When it comes to Apple Inc. (AAPL), its massive metrics (such as market capitalization in excess of half a trillion dollars and iPhone quarterly sales in excess of 37 million units) have triggered several analogies to draw attention to its scale, penetration and power.
There have been plenty of articles comparing Apple Inc.'s market capitalization to other countries' GDP, such as "Apple is now worth more than the GDP of Sweden", and "at $500 billion, Apple is worth more than Poland". Although such headlines provide very interesting statistics, at the end of the day, in the case of Apple, such headlines are not comparing "apples to apples". In its article of 3/13/2012, "is Apple really worth more than Poland", the British Broadcasting Corporation "BBC" correctly pointed out that Poland's real comparative value would actually be $2.5 trillion.
In his analogy, "there are more iPhones sold every day than babies born", Alex Heath does indeed stress the penetration power of Apple. Such corporate power is nothing new to America. As a matter of a fact, in 1923 our grandfathers could have written an article titled, "Ford produces more Model-T cars in 1923 than U.S. babies were born during first 8 months of the year". With 2.05 million Model-T cars produced in 1923 and 2.9 million U.S. babies born that same year, it may not sound very impressive by today's standard, especially that Mr. Heath's analogy examines number of babies born globally, and not only in the U.S. However, in the 1923 mindset, such a statistic would have possibly been even more sensational and impressive than Apple's accomplishment. After all, a car is a much bigger investment than a phone, and in 1923, with a lower divorce rate than today, some may believe that family life occupied center stage more than it does today.
Nevertheless, no one can deny that today is "Apple's Age" and indeed, Apple's economic impact is quite substantive. With its latest announcement for a $10 billion stock buyback and $2.65 per share quarterly dividend, Apple's cash infusion into the economy is paramount to an economic stimulus, the Apple Stimulus.
During the next three years, such stimulus will add up to about $45 billion, or about $15 billion per year. Relative to the massive size of the U.S. $15 trillion economy, such a number may sound minimal at 0.1% of U.S. GDP. However, when U.S. GDP is expected to grow by an average of about 2.5% for 2012, Apple's annual $15 billion is about 4% of the expected change in U.S. GDP.
It should be noted that when applying economics 101, dividend payments will not actually result to a change in the current calculation for GDP; dividends do not represent goods and services from current production, hence, having no immediate impact on current GDP estimates and gross domestic income. However, such Apple stimulus will have a positive effect on the economy and markets in the following three ways.
1. Increase in personal income
Apple dividends will result in an increase in U.S. personal income. The relationship is not necessarily one-to-one, as dividends are also being paid to non-U.S. shareholders. The ultimate effect on U.S. disposable income may differ slightly, due to taxation of dividends, which would also lead to an increase in government tax receipts.
Although many investors may opt for dividend reinvestments, it is very likely that an increase in personal income will lead to some increase in consumption down the line. Again, when going back to economics 101, where GDP = consumption + investment + government spending +(exports - imports), a future increase in consumption or government spending will result in a future increase in GDP. It is very possible that Apple itself will benefit from such an increase in consumption, as some Apple investors may use revenues from the Apple stimulus to actually buy Apple products.
2. Dividend reinvestment
Apple shares are owned by institutional investors including mutual funds, as well as individual investors. Most institutional investors will typically reinvest dividend payments, while it is estimated that only about 10% of collected dividends are reinvested by individual investors. Nevertheless, any dividend reinvestments that are directed back into Apple shares will further augment Apple's share buyback program. If a total of 20% of dividend payments is reinvested in Apple shares (for institutional as well as individual investors), that would lead to an additional purchase of over $6 billion of Apple shares during the next three years (in addition to Apple's own $10 billion buyback program).
3. Capital gains
Apple's share buyback program will provide support for Apple stock, and as demand for the shares increase, it is possible that such a factor will cause Apple shares to appreciate. Some would argue that historically, share buybacks may have signaled the climax in the price of certain stocks. We do not believe that would be the case for Apple.
The current buyback program is being pursued for the reason that Apple simply has accumulated (and continues to accumulate) too much cash that it does not need (over $97 billion). Hence, Apple is not embarking on such a road because it is trying to support its share price for fear that its business is peaking. Currently there is no indication that Apple's business is peaking, while many analysts have upgraded Apple's share price target to about 20% higher than current market levels.
Higher share prices for Apple will lead to increased capital gains, which in turn will provide further investment and consumption dollars to individuals. This will further support major market indices, especially indices where Apple represents a large percentage of the index, such as the NASDAQ 100 index. A possible support for some market indices will also result in improved sentiment, which in turn will yield higher consumer confidence and consumption.
It is very possible that in the very short term, markets may hesitate and take a break following the recent run-up in prices. Some may feel that most of the positive news, including Apple's dividend and share buyback program, is already factored into the markets. However, we believe that the above three factors will cause the Apple Stimulus to provide some support for the economy, markets, and Apple shares in the intermediate term. At the same time, despite Apple's scale, Apple is only a fraction of the U.S. economy, and it certainly cannot carry the U.S. economy on its own. Hence, although Apple will most likely contribute positively to the markets and economy, such a contribution will not be evident unless it is not overwhelmed by other macro factors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.