Apple: $110 Billion In Buybacks For A 13.98% Total Shareholder Return
- Apple will be doing a lot of return of capital to shareholders.
- It's most important revenue line item continues to grow strongly.
- The stock looks worth buying if you believe there is strong customer captivity.
Apple's (NASDAQ:AAPL) earnings call turns me as bullish as I've been in a long time on the stock for 2 primary reasons: the enormous buyback program and services revenue. Having said that I'm simultaneously frightful of general stock market valuations and a recession somewhere between 6 and 24 months from now.
Here's what Cook said about services (emphasis added):
Q2 was our best quarter ever for services and momentum there continues to be incredibly strong. Revenue topped $9 billion for the first time, up more than $2 billion over last year's March quarter. We had all-time record revenue from the App Store, from Apple Music, from iCloud, from Apple Pay and more.
Services is the key to get the market to re-rate Apple as a company with a sustainable revenue base instead of vulnerable consumer cyclical. I've been arguing for years the services growth is extremely important:
The positives are becoming more impactful on the company. With revenue from services up 24% and revenue from iPhone sales -13% (-5% in number of units), Apple is becoming less of a one-product company (I know this will offend a lot of people, but it has been true for some time) and more of a software company. The latter is a much more attractive business and is generally awarded a higher multiple. The company also showed it can grow services revenue while the number of sold devices declines by 5%.
I believe services are so important because the device business is so vulnerable. The more people are pulled into all paid apps and cloud services the harder it becomes to switch to Android in a recession. The growth, momentum and size of the services business is very encouraging and an important to Apple its valuation:
Another thing I like to look at is revenue distribution across geographies and Americas make up a good chunk but Apple is doing well in China which has been one of my concerns over the last few years as well and I wrote about it in Apple's China Problem and Apple's Tencent run-in. It's getting there where I think you can make a legitimate case Apple is more than a single-product company. It's revenue mix has undeniably improved and the growth rate on the higher value type of revenue remains much higher!
However, it is still not the ideal type of services business because of the relationship between the sales of the product and those services. It will be interesting to see what the next recession will do to the sales of the leader in the high-end smartphone market.
Insane Buyback Program
Apple announced another large buyback program (emphasis added):
Given our strong confidence in Apple's future and the value that we see in our stock, our board has authorized a new $100 billion share repurchase program which we will start executing during the June quarter. Considering the unprecedented size of this new authorization, we want to be particularly thoughtful and flexible in our approach to repurchasing shares. Our intention is to execute our program efficiently and at a fast pace.
That's $100 billion of buybacks being thrown at shares outstanding. This is in addition to $10 billion that's still on its old buyback program and $15 billion in dividends it wants to pay on an annual basis. If they finish the new program within a year (unlikely) it equates to a ~13.98% shareholder return. You can do worse.
If you consider everything from growth, geographic diversification, % of services revenue, $267.2 billion in cash, only $122 billion in debt, capital allocation towards buyback, EPS estimates for next year and the potential hit it will take in a recession, the company looks attractive. Officially it trades at a 15x forward P/E ratio, but if you adjust the numbers for excess cash and buybacks it trades at like a ~10x forward.
I write both bullish and bearish articles on the stock whatever I believe to be warranted. My concerns for the reliance of iPhone revenue has always kept me out and I've always been wrong. The sales dynamic of a high-end device in a recession is still something that I think is quite tricky. If you believe the revenue is very sticky due to customer captivity now looks like a great time to add or buy even after the stock has had a good run.
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