Former market darling Apple Inc. (NASDAQ:AAPL) announced earnings last week that came in slightly ahead of the analyst consensus. While this is certainly a positive bit of news, it isn’t what had investors truly excited. What really made the difference was the announcement of the company’s plans to begin returning some of its monster cash pile to investors, a move that according to some is long overdue. Is this enough to restore confidence in Apple’s stock?
While not the most salient point of the report for many investors, it may be useful to take a quick look at Apple’s earnings before moving on to their cash position. EPS for the quarter came in at $10.09 versus a consensus of $10.00. This is encouraging, but is important to note that this is down from $12.30 in the same period a year ago for a fairly hefty 18% decline, the first in over a decade.
Revenue on the other hand rose 11% to $43.60 billion, beating the $42.33 billion consensus estimate for the quarter. Sales figures came in better than expected, with iPad sales up from 11.8 million units in the same period a year ago to 19.5 million for this quarter. On the other hand, the gross margin declined somewhat to 37.5%, under previous guidance and well below the 47.4% it achieved in Q2 2012.
Apple Inc. (NASDAQ:AAPL) guided a little lower going into the third quarter of fiscal 2013, now expecting revenues of between $33.5 billion and $35.5 billion versus $35 billion in Q3 2012. Gross margin is expected to decline further to between 36% and 37%. Analysts are looking for EPS of $9.08 in Q3, down from $9.32 in the previous year.
The Embarrassment of Riches
For a long time, the company prided itself on its enormous balance sheet, totaling some $145 billion in cash. To put this ridiculous figure into perspective, the amount of cash the company has lying around is more than the nominal GDP of a country like Vietnam or roughly three times the GDP of a country like Bulgaria. Apple Inc. (NASDAQ:AAPL) has increasingly come under fire from shareholders for not returning some of this cash, and now has finally announced a number of measures to do just that.
First of all, the company announced a dividend hike of 15% to a quarterly dividend of $3.05 per share. The company will now pay some $11 billion annually in dividends, and plans to review its payout every quarter. Secondly, Apple Inc. (NASDAQ:AAPL) has announced plans to drastically increase its share repurchase program from $10 billion to $60 billion, the largest share buyback authorization in history. Finally, in order to facilitate the return on capital program, the company plans to start taking on some debt.
The news was met with approval from some investors, but the real question is whether these decisions are enough to restore shareholders’ confidence in the company. The issue of what to do with its cash reserves, while certainly an important one, is not the main problem. The problem is whether Apple Inc. (NASDAQ:AAPL) will be able to remain competitive in an increasingly crowded environment where it is facing stiff competition from cheaper, and sometimes better alternatives.
This will to a large degree depend on the company’s ability to keep innovating its product lines, which so far has proven to be challenging. The iPhone is certainly not as hot a product as it used to be, and the iPad, while popular, is also facing competition from Android and Windows 8 devices. Apple Inc. (NASDAQ:AAPL) as a company has lost a great deal of its shine in the last six months or so, a development that can not be remedied simply by a share buyback and a dividend hike. It thus remains to be seen if Apple can regain its leadership position in the industry.
What’s the Competition Doing With its Cash?
While it is no slouch in terms of its cash position, tech giant and prime competitor Google Inc (NASDAQ:GOOG) doesn’t suffer from quite the same cash return issues as Apple. The company has some $50 billion in cash and operating cash flow in excess of $16.5 billion, which is also a lot of cash to have lying around. Admittedly, Google Inc (NASDAQ:GOOG) uses a lot of money for expansion and acquisition, but some investors believe that Google, like Apple, should start paying a quarterly dividend.
Another historic competitor in the operating system space, Microsoft Corporation (NASDAQ:MSFT), has been paying dividend for years, currently yielding a healthy 3% annually. The company’s dividend growth has outpaced the industry since 2009 at least, and its dividend is sustained by a payout ratio of 44%. With cash reserves north of $74 billion, and a huge operating cash flow of $30.61 billion, they easily have the means to do so and continue doing so.
The Bottom Line
While Apple reported earnings and revenue that beat the consensus estimate, it was the unveiling of the company’s plans to return some of its massive cash hoard to shareholders that had investors excited. While the company is clearly facing some headwinds, which have been reflected in its dramatic drop in share price, the measures undertaken to better manage its cash reserves may serve to incite some confidence in the company as well as its management. The real question however is whether the company will be able to remain innovative and competitive in an increasingly challenging environment.
The article Apple Finally Putting its Cash Pile to Use, But Is it Enough? originally appeared on Fool.com and is written by Daniel James.
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