At the end of December Apple (NASDAQ:AAPL) had $285.1 billion in cash and investments and $122.4 billion in debt. This works out to be a net cash position of $162.7 billion. While $269 billion, or 94%, of the cash and investments, is overseas, with the new tax laws it looks like Apple could bring it back since it plans to pay $38 billion in taxes on it.
Luca Maestri, Apple’s CFO, said on the December quarter’s earnings conference call that the company’s net cash position should be neutral over time. While he didn’t gave a timeframe that this would occur, he did say that being able to bring back the overseas cash does not change management’s acquisition thought process. This narrows down what the cash could be used for to stock buybacks and dividends.
Apple could opt for a one-time dividend and it could be substantial. However this is a short-term move and I believe Cook and the board thinks long term.
There also are some political considerations to take into account since there's a lot of press that the tax reform package benefits corporations and wealthy individuals more than the average person. A one-time dividend falls into the wealthy individual side of the equation.
Increasing the annual dividend is a no brainer
An increase to Apple’s dividend is definitely in the cards, the question is how much. For the past three years it has been raised by 11%, 10% and 11%, respectively. At the current $2.52 per year the dividend’s yield is 1.5% and cost the company $12.8 billion in fiscal 2017. The total cash cost for Apple has essentially risen 5% per year.
I believe Apple will increase the dividend by at least 11% and maybe up to 20% but may be reluctant to go much higher even though it could. This is because management and the board will want to continue to increase it every year, and the compounding impact will become more pronounced after four or five years. It may be better to give it a 10%-15% bump and use the excess cash to buy back more stock, which decreases the need for dividend payments.
Stock buybacks is probably where most of it is used
This is probably where the bulk of the extra cash gets used. It has the benefit of bringing down the share count to increase EPS and lowers the cash need for dividends. It could make a lot of sense for Apple to execute another Accelerated Share Repurchase Agreement to retire a large number of shares.
With the stock sporting a PE multiple of 14.5x on fiscal 2018 EPS estimates buying shares is the equivalent of a 6.9% return. While it is not as good as compared to when the shares were much lower, it isn’t that bad of a guaranteed long-term return.
How many shares could Apple buy and what does it do to EPS?
Let’s assume that Apple uses $150 billion of the $163 billion to buy back shares. The stock is up in after-hours trading to $173 but assuming it moves higher by the time all the cash is spent I’m using $200 per share to be a bit on the conservative side. These are my calculations:
- $150 billion spent on buybacks
- At $200 per share
- 750 million shares can be bought back
- There were 5.158 billion diluted shares at the end of December
- This would decrease the share count by 14.5%
While it may be able to I don’t expect Apple to deploy all $150 billion in fiscal 2018. Using a $12.50 EPS estimate for fiscal 2019 Apple’s EPS would be $14.62 after buying back 14.5% of its shares, adding $2.12 to EPS.
Annual free cash flow to be used on dividends and buybacks
After capital expenditures, acquiring intangible assets and acquisitions, Apple has generated just over $50 billion in free cash flow the past two fiscal years. Given Maestri’s statement the bulk, if not all, of this will be returned to shareholders. Depending on the stock price and how large the dividend grows, Apple should be able to buy back 3% to 4% of its shares on a yearly basis.
One offset is the lost other income that the company won’t realize from the $150 billion. Per Apple’s 10-K filing it generated a 1.99% return on its cash and investments last year. Assuming that it could earn more since interest rates are rising, at a 2.5% yield it will not generate $3.75 billion in other income. This can be easily absorbed in its annual cash generation.
What it means for the stock
I don’t believe Apple, or most any other company, gets full “credit” for having a large amount of cash on its balance sheet. Until it is deployed in some manner investors will discount the value of it. However, if it is used to buy back shares the full value of it can be realized since the bulk of investors use a PE ratio when analyzing a stock.
Assuming that the “lost” interest income is absorbed in the company’s annual profit applying a 15x PE multiple to the extra $2.12 would add $32 to Apple’s stock price.
Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Sand Hill Insights and Chuck Jones are not registered investment advisors (RIAs) or broker/dealers. Readers are advised that the material contained herein should be used solely for informational purposes. Sand Hill Insights/Chuck Jones does not purport to tell or suggest which investment securities readers should buy or sell. Readers should conduct their own research and due diligence and obtain professional advice before making investment decision. Sand Hill Insights/Chuck Jones will not be liable for any loss or damage caused by information obtained in our materials. Readers are solely responsible for their own investment decisions.