Apple Shrugs off Inertia, Declares Dividend Hike

Edited by Vani Rao

Announces capital returns program, stock split, and price cut post stellar earnings

Apple Inc. (NASDAQ: AAPL) announced a $30-billion hike in its capital returns program and an 8% hike in dividends to investors to $3.29 per share. The company also announced a seven-to-one stock split, aimed at improving stock liquidity for investors. However, the cash dividend and share buyback program could impact the overall cash availability with the company.

Apple answers investors’ call

Apple has been under lot of pressure lately to either declare dividends or announce share buyback. In order to pacify investors, Apple announced an additional $30 billion of share buyback apart from its current level of $60 billion. It also announced a cash dividend payout of $3.29 a share payable of May 15, 2015 for all shareholders on record as on May 8, 2015. Apple’s board of directors has also authorized a $130-billion capital returns program to be executed by the end of calendar year 2015.

Source: Company Reports/WSA
Source: Company Reports/WSA

The iPhone maker generated $13.5 billion in cash flow from operations and distributed almost $21 billion in cash to shareholders through dividends and share repurchases during the March quarter. As shown in the graph above, Apple still sits on a massive cash pile of $150 billion, a majority of which is stacked overseas. However, if Apple brings in its cash from other nations, it is liable to pay Federal taxes of 35%.

In order to fund its colossal capital returns program and dividend payout, the California-based company is planning to raise cash through the sale of $17 billion worth of bonds. Furthermore, Apple wants to bank on lower interest rates in the US and negligible interest rate in the European region.

Dow Jones dreams

Apple has also declared a seven-to-one stock split, the first after its two-to-one stock split announced in 2005. A seven-to-one stock split would not affect investors’ stake in the company. Shareholders as on June 6, 2014, will get seven shares for each Apple share that they hold in the next trading session. This means to say that an Apple shareholder with one share worth $560 stands on par with a shareholder holding seven Apple shares of $80 each.

With the stock split, Apple would now find a place in the Dow Jones Industrial Average Index (DJI), which improves its creditability by being part of a premier group of companies. After the stock split, Apple’s shares would now trade below the $100 mark, making it the most eligible stock to be part of the blue chip companies in the DJI. Apple was earlier not a part of the DJI since it is a price-sensitive index and the highly priced Apple stock would largely impact its movements.

Shifts focus on developing economies and lower-priced products

In a major market penetration strategy, Apple announced that it has improved its MacBook Air with faster processors while reducing the prices. The major price reduction comes after the cheaper iPhone 4s stole the show during the stellar Q2 FY2014 performance. Apple, a forerunner in the smartphone market, reported Q2 revenue of $45.65 billion, compared to $43.60 billion in the prior-year period and Street estimates of $43.53 billion. Net profit improved from $9.54 billion to $10.22 billion, or $11.62 a share, beating analyst consensus of $10.17 a share.

Revenue from iPhone sales, which accounts for more than 50% of the total revenue, increased 14% YoY, while revenue from iTunes, Software, and Services improved 11%. While Mac sales remained flat with 1% YoY growth, revenue from iPad sales declined 13% YoY, despite the launch of the new iPad Air with retina display during the holiday season. Due to a favorable mix products with higher margins, gross margins improved from 37.5% in the prior-year quarter to 39.3% in Q2.

In Q2, the iPhone maker entered into agreements with China Mobile and Japan’s DoCoMo for sale of iPhones through their outlets to 4G mobile services subscribers. During Q2, Greater China’s contribution to total revenue improved to 20% from 19% in the year-ago quarter, while Japan’s share improved 2% YoY to 9%. In Japan, iPhone unit sales recorded a 50% YoY growth with strong double-digit growth in emerging markets like Brazil, Indonesia, Poland, and Turkey, while sales doubled India and Vietnam.

Rise of lower-priced iPhone ‘4s’

Source: Bloomberg/WSA
Source: Bloomberg/WSA

As shown above, during Q2, iPhone unit sales increased 17%, while net revenue improved only 14%. Average iPhone price reduced from $613 in Q2 FY2013 and $637 in Q1 FY2014 to $596 in Q2. The company had announced a hefty discount for its iPhone 4s model, which formed the bulk of the total iPhone units sold in Q2. This is the major reason for the overall decline in average iPhone prices despite the launch of the premium priced iPhone 5c and iPhone 5s last year. Apple had also relaunched its older versions of iPhone 4 for the price-sensitive markets of India and Brazil.

Apple now considers “price” as a factor to drive sales and combat competition from cheaper Android-driven smartphones. After the earnings release, Tim Cook in a statement said:

“We’ve seen our ability to attract new users to iPhone to be very significant in the emerging markets. So, this to us give us a great comfort that we can continue to grow and we may not be able to attract some of those buyers to our top phone because of the price point. But if we can get them in on the entry iPhone, it gives them a great product, at a great value and gets them into the ecosystem.”

In the coming quarters, Apple is looking to launch some products for the price-sensitive consumers, as they now will be a major part of the Apple ecosystem. Apple is likely to announce its most awaited improved iOS 8 in June 2014 at its annual Worldwide Developers Conference in San Francisco and reveal the new iPhone 6 in September 2014.

Following the earnings release on April 23, 2014, Apple’s stock rallied 8.2% to close the day at $567.77. The stock has gained 12.45% post the earnings release and is currently trading at $590.09 as on April 30, 2014.

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