The Surprising Truth Behind Apple’s ‘Hidden Yield’
Back in the boom days of the late 1990s, there was little interest in reliable dividends. It was the dawn of a new millennium. Many viewed quarterly distributions with open disdain, the sign of an aging business with nothing better to do with its money.
It was hard to sell a 3% or 4% dividend when some next-generation growth stocks were soaring ten times that much in a single day. I was a young financial advisor at the time, and my clients all had just one thing on their minds. It wasn’t income.
Nobody wanted that easy bird in the hand – not when they could forage around in the bush for bigger game.
Remember JDS Uniphase? The maker of optical networking gear was seemingly unstoppable, surging to $1,200 per share. Few had any real clue what the company did — but they all wanted in anyway.
Call it hunting. Call it speculation. Whatever you call it, the dot-com crash ended it. For the record, JDS Uniphase lost 99.8% of its value over the next few years. Hundreds of these highfliers crashed and burned. A painful lesson.
A Shift In Priorities…
Investors haven’t forgotten. Sure, we still love to see exciting breakthroughs and rapidly expanding profits. But after being burned by those “hot” stocks, we’re more cautious and discerning. It’s no coincidence that the prevailing attitude regarding capital returns has also made a 180-degree turn.
In years past, it was all about who had the biggest Capex spending budget… Who could produce the most widgets… Who could grab the most market share… So companies spent money hand-over-fist on any new project or proposal that was put in front of them. Costs be damned.
Long story short, a lot of money went down the drain on ill-conceived acquisitions and investments that didn’t pan out. At some point, the investment community started to demand a keener focus on returns rather than growth at any cost.
The market grew tired of profligate spending and waste. There is now an expectation that businesses deploy their capital efficiently – and share any surplus with shareholders. What was once passe is now back in fashion. Just try to find a large U.S. company that doesn’t proudly distribute dividends or execute stock buybacks… or both.
As priorities changed, so did executive compensation packages. Managers are now judged by returns on invested capital (ROIC). This held them accountable for optimizing the cash at their disposal. There’s incentive to create lasting shareholder value rather than simply meet arbitrary short-term earnings targets.
Activist shareholders, in particular, have put increased pressure on board members. Thankfully, investment criteria for acquisitions and expansion projects get more scrutiny than before. Not every growth avenue is pursued… only those capable of earning excess returns above their cost.
The keyword is “disciplined”.
Apple’s “Hidden” Yield
Even in the tech world, dividends and buybacks have become almost customary.
Sure, companies like Apple (Nasdaq: AAPL) are always looking to move the earnings needle. But they are more circumspect with their spending – and more willing to share any surplus. Following record earnings, the iPhone maker returned $24 billion to stockholders last quarter alone. For perspective, that’s more than the annual GDP of Iceland.
But I think we’re on the precipice of another attitude sea-change. This time, the focus isn’t on the amount of money returned to shareholders. It’s the manner.
Let’s return to Apple for just a moment. As I said, the company dished out $24 billion last quarter. Believe it or not, less than $4 billion of that was in the form of dividends. The rest (more than $20 billion) went into share repurchases.
In other words, for every $1 in dividends, the company spent more than $5 on stock buybacks. Why such a dramatic difference? Well, it comes down to getting what they think is the best bang for the buck.
I’ll let Apple’s Chief Financial Officer (CFO) explain.
“We believe the stock is undervalued and so we have a bias toward the buyback. We’re going to be returning more than $13 billion a year to investors through dividends, but we believe that given where we are with the valuation of the stock, we think that we continue to do the buyback primarily.”
When you look at it this way, you can understand why Apple upped its buyback authorization last year to $175 billion. It’s hard to argue with the results. Since 2012, these buybacks have systematically shrunk the share count from 6.6 billion to the current 4.5 billion – increasing the value of those remaining shares by nearly 240%.
Take a look at the chart below, and you can see how that’s impacted the stock…
Still, for the sake of argument, what would Apple’s yield look like if it chose to funnel all that cash into dividends rather than splitting it up? The company has invested $79 billion in buybacks over the past four quarters, along with $14 billion in dividends.
If the entire $93 billion went towards dividends, the company would have shelled out a whopping $20.66 per share – for a yield of 7.7% based on recent prices.
Think about that for a moment… Apple yielding 7.7%.
This scenario may not be entirely hypothetical. And I don’t mean to pick on Apple. The truth is, there are a lot of companies in a similar position. But that’s all about to change… I’ll get into the reasons why, and what that means for investors, in a later piece. There’s just a lot of ground to cover on this topic.
But the good news (for income lovers) is this: If this trend continues, it will free up more cash for dividends.
Now, will Apple start paying more in dividends overnight? I wouldn’t count on it. In fact, in my most recent research report, I discussed why I think it’s time for investors to sell Apple.
I know it sounds crazy. But if you check out my latest research, you’ll start to understand why.
It all boils down to this… The Covid-19 crisis will lead to a fundamental shift in the way companies think about liquidity – and how they return cash to shareholders. And there are much better choices out there for investors who are looking for higher yields.