Late Sunday night, we found out that Apple (AAPL) was planning a Monday morning conference call to discuss its use of its large cash hoard going forward. In my prediction article, I stated that I believed a $2.50 quarterly dividend was coming, and that Apple would only start a buyback program if they tapped into their money held outside of the United States. That money represents about two-thirds of the more than $100 billion in cash and estimates we presume that they currently have on their balance sheet.
On Monday morning, Apple announced a dividend and a buyback. Here are the highlights, extracted from that press release:
- The Company plans to initiate a quarterly dividend of $2.65 per share sometime in the fourth quarter of its fiscal 2012, which begins on July 1, 2012.
- Additionally, the Company's Board of Directors has authorized a $10 billion share repurchase program commencing in the Company's fiscal 2013, which begins on September 30, 2012. The repurchase program is expected to be executed over three years, with the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.
- "Combining dividends, share repurchases, and cash used to net-share-settle vesting RSUs, we anticipate utilizing approximately $45 billion of domestic cash in the first three years of our programs," said Peter Oppenheimer, Apple's CFO.
Before I get into my formal analysis, let me make a quick point or two. First, the dividend won't be coming for another few months. Anyone who thinks that they'll be getting that $2.65 in the next month is mistaken. The first payment will be between July and September. Secondly, the buyback program will not start until October at the earliest. Third, they mentioned use of $45 million in domestic cash.
As I mentioned in my preview article referenced above, estimates are that Apple has between $30 and $40 billion in domestic cash and investments. So utilizing $45 billion over three years ($15 billion per year) seems fine to me. I don't think that they will need to use any foreign monies. Now, let's get into why you shouldn't buy this name for the dividend and buyback.
Like I said above, the dividend won't be first paid until July at the earliest, and I'm figuring August will probably be about it. So if you are buying Apple now just to get the dividend (forget everything else for this argument), you are wasting your money. There are probably dozens of other names out there that will pay at least two other quarterly dividends before Apple pays its first. Why not scoop up one of them first?
I'll even give you two examples. Intel (INTC), which paid a dividend to shareholders of record on Feb. 7th, will have another dividend for those in the name in May and August. Also, Microsoft (MSFT) just announced their quarterly dividend. If you're in Microsoft by May 17th, you get the payout. That means another one in mid-August. These are just two example of names that will have at least one, if not two, more dividend payouts before Apple will. Now remember, I'm talking about this all in isolation, just regarding the dividend. I'll get into Apple more later.
Secondly, if you are only buying the name for its yield, why even bother with Apple? The yield will be about 1.8%, based on Apple's Monday morning price. That isn't tremendous. I know that their are dozens, maybe even hundreds of names that yield more than 2%. I'll even give you ten examples here. By the way, Microsoft and Intel are on that list, as their dividends are nice and have been rising greatly in recent years. I'll even give you Philip Morris (PM), which is my favorite value name currently. It is yielding about twice what Apple will be when the dividend is eventually paid.
For this argument, let's examine the quote given on the buyback.
The repurchase program is expected to be executed over three years, with the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.
So while Apple is buying back shares, it really won't be lowering its outstanding share count. In fact, there is the potential that the share count might still rise over the next three years, even with the buyback. They are only trying to keep the share count level. Hmm. Where have I heard this argument before? Well, for those of you who have followed my writing on Apple, I wrote a piece about this in late November.
Based on the historical trend I analyzed involving Apple's rising share count, based on employee and executive options and such, I estimated that Apple needed to buy back $4.5 billion per year just to keep the share count level. Now Apple is expecting to buy back $10 billion over three years, which means that the share count could still rise, depending on how many options are granted, exercised, etc. Maybe someone at Apple read my article.
Another thing about the buyback, as mentioned above. It won't start until after this fiscal year ends at the end of September. That means we are more than six months away from the start of the buyback. Again, if you want to buy a stock currently involved in a buyback, try Microsoft, which is buying back $1 billion each quarter, Intel, which bought back over $4 billion in the fourth quarter alone, or Philip Morris, which plans to spend $6 billion this year on stock buybacks.
So Why Buy Apple?
Easy answer: Not for the dividend or buyback. Not yet anyway.
So why buy Apple? Well, have you heard of either the iPad or the iPhone? If you haven't, you probably just came out of hibernation and have been gone for a number of years.
Let's start with the iPad. Apple just released a new version last week, which has gotten lost in the shuffle thanks to the dividend and buyback news. When Apple releases earnings in about a month, people will care about the iPad and not the dividend. There were some rumors that the new version of the iPad costs more than the iPad 2, which is concerning to a point.
Yes, margins will come down a little it seems, but at this point, it is all about sales. Would you rather see, for example, 25% overall margins on $40 billion in sales, or 24% margins on $50 billion in sales? I'm just throwing numbers out there, but you should get the point. According to Apple, they have sold 3 million new iPads already, which makes it the most successful iPad launch to date. This is great news for the company.
But the real driver for Apple currently is the iPhone. If you look at Apple's most recent 10-Q, for their fiscal first quarter, sales of iPhones and related products and services came in at $24.417 billion. That's more than half of Apple's $46.3 billion revenues for the quarter. Now we know the percentage will fluctuate from quarter to quarter, but the iPhone should contribute no less than 40% of revenues in the next few quarters. Apple sold a ton of iPhones for the holiday season, and do you think this year will be any different if they release a new version (iPhone 5 perhaps?) sometime in late summer or fall?
I must also mention Mac sales, which hit a new record of nearly 5.2 million in the fiscal first quarter for Apple. While other computer names are seeing sales flat to down significantly, Apple is selling more and more. While I don't expect them to hit a record in this non-holiday quarter, I still think the year over year numbers will be up. Remember, Apple only has a small market share in this line of business. There is a nice opportunity for them to grow.
So all in all, what does this mean? Well, current estimates have Apple at nearly $158 billion in revenues for this year, and $43.13 in earnings. That compares to the previous year of $108.25 billion and $27.68 respectively. Remember, this "year" is their fiscal year, which ends in September. For the following fiscal year, ending in September 2013, current estimates call for $184.3 billion in revenues and $48.36 in earnings per share.
What is my prediction then? Well, my last estimates for Apple this year was $160 billion in revenues and $45 in earnings per share, with a 12 times earnings multiple. That gave me a $540 price target on the name. Obviously, I am going to raise my estimates, but only slightly until we get the quarterly results next month. I'm going to bump up my revenue number to $165 billion, and my earnings per share number to $46.50. However, the big change comes in the multiple. I am raising my multiple from 12 to 14 for this year. That implies a price target of $651 for this fiscal year.
I will also introduce my first estimates for the following fiscal year. I am predicting $200 billion in revenues currently, with an earnings per share estimate of $54.00. However, I am going to take down my multiple number slightly, from 14 to 13.5 for that fiscal year. Apple will still grow at a tremendous rate, but growth numbers are slowing down. Even with that 13.5 multiple, I still have a target for Apple of $729 by the end of the next fiscal year.
That being said, Apple can be bought here, but I'm waiting for the next slight pullback. I had expected a slightly smaller dividend and no buyback from Apple, which I though might send shares lower for a day or two. I was hoping to get Apple for myself at around $550, but I don't know if that will be possible anymore. At the moment, I'm targeting an entry of $575 to $585, but I'll see how we trade in the next few days. The future of Apple is bright, but don't buy this name for the dividend or buyback.