Apple’s Quarterly Report
By far the most significant (and unexpected) part of Apple’s quarterly report was the announcement that the company is increasing its share buyback program from $10 billion to $60 billion. A few weeks ago, I wrote an article discussing the various rumors that have been circulating regarding the company, and I discussed three ways Apple Inc. (NASDAQ:AAPL) could have put their cash to better use: dividends, buybacks, and acquisitions. Issuing “i-Preferred” shares or some of the other suggestions were never really on the table.
Dividend Hike
A higher dividend is nice, as it creates a “price floor” effect. As the share price of a high dividend stock drops, at some point the yield will become so high as to attract new investors. At $400 per share, Apple currently pays around 3%, including the dividend increase announced with the recent report. If shares were to fall to say, $300, Apple would yield over 4%, and serious income investors would find the stock much more attractive. However, the dividend does nothing to increase the intrinsic vale of the stock, and is not the best way to return more capital to investors.
The Buyback
Thankfully, Apple Inc. (NASDAQ:AAPL) was thinking the same way, and as Tim Cook put it, “We concluded that investing in Apple was the best.” The buyback increase is much more significant than it seems. By increasing the buyback to such an unprecedented level, Apple is telling the market, “our shares are so cheap at these prices, that the absolute best way that exists to use $50 billion in cash is to buy some of our own stock at this amazing discount.”
How big is the buyback? At $400 per share, a $60 billion buyback equals 150 million shares, or almost 16% of the entire float. This is a tremendous amount, especially considering the company intends to complete this in just over two and a half years, by the end of 2015.
No New Products until fall: A Good Thing?
Certain companies, such as Google Inc (NASDAQ:GOOG) like to hype their products well in advance, letting consumers know exactly when the next big thing will be available. With the Google Glass, they are even doing a test run, releasing a small number of their new devices on the market to create more anticipation. This can work just fine, but it causes their stock to move well in advance of anything actually happening.
The same can be said about other tech giants such as Microsoft Corporation (NASDAQ:MSFT). The Windows 8 release was so hyped up for months before it went on sale that anything less than blowout sales numbers was sure to disappoint the market. A lot of investors like the approach of these companies, as it creates great opportunities to buy and sell as products are announced and released. However, Apple goes in another direction…
Apple Inc. (NASDAQ:AAPL) likes to do the exact opposite. Apple loves to surprise the market, giving a few hints just a few days before revealing a big product change. We all know the breakthrough products that Apple is supposedly working on (iWatch, iTV, etc.), but we still have no real idea how far off any of that is.
So, when Tim Cook says that we will see some great new products hitting the market this fall and next year, you can bank on the fact that we won’t even hear any specifics until a few days before the actual product announcement, which is usually just days before the product goes on sale to the public.
The Bottom Line
When you combine the almost certain lull in anything new from Apple Inc. (NASDAQ:AAPL) between now and the fall with the fact that the market simply doesn’t trust that the company has any real innovations left, this creates a great opportunity to accumulate shares if you believe that the company still has some tricks up its sleeve and is grossly undervalued. I believe that, and as of this past week, so does Apple Inc. (NASDAQ:AAPL).
The article Why I’m Ecstatic About Apple’s Report originally appeared on Fool.com and is written by Matthew Frankel.
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