Apple Inc Faces a Tough Decision

Apple Inc.

Apple Inc. is planning to pay a quarterly dividend of $3.05 per share to “shareholders of record” on Thursday.  Investors typically receive a dividend 45 days past the end of each of its fiscal quarters.  With the stock price currently at $520.01, Apple will yield a dividend of 2.35 percent, but with the current market volatility, Apple Inc. faces a tough decision – whether dividends or buybacks will help to better their bottom line.

The dividends are paid from the cash on hand of the company and, as such, reduce the overall company value.  The value of Apple’s stock is then adjusted by NASDAQ to account for the dividends.  However, because investors receive the dividend and will receive future dividends while the value of the stock increases, the loss they realize in the value of their shares of Apple Inc. is offset.  The quarterly dividends of Apple Inc. saw an increase of 15 percent this year, equaling $2.8 billion paid to investors.

Also increasing the value of Apple Inc.’s shares is its company buyback program.  Purchasing stocks and then “retiring” them makes the shares themselves harder to obtain, causing the value of the stock to increase. This year, Apple added $50 billion to its stock buyback program, which further removed 36 million shares from the market.  Buying back these shares takes them off of the market so that Apple does not have to pay dividend on the shares it has bought back.  However, due to the unpredictable nature of Apple’s earnings, which are based on the development of new products, Apple, Inc. is now facing a tough decision due to the possibility of not meeting market expectations in the 1st and 2nd quarters of 2014.

Meanwhile, Carl Icahn, an investor worth billions,  has proposed an investment of $150 billion in Apple’s buyback program, funds which would be repaid at a 3% interest rate.  Apple CEO Tim Cook is said to be considering the proposal, but is wary of incurring that much debt.  Icahn maintains that, despite Cook’s reticence, “We are not leaving Apple, we are there to stay.  Apple needs a board that goes in and does a huge buyback. We are saying that. I respect Tim Cook and I expect to talk to him again very shortly and I think he is doing a very fine job.”  It’s reported that both men agree that Apple Inc. is currently undervalued. The fact that Apple stock is being moved away from growth funds and into value funds instead suggests that the market feels the same.

The idea of larger dividends does not sit well with investors seeking long-term growth from Apple.  The nature of Apple’s business is volatile, and a one-time infusion of funds with its concurrent acquisition of debt would not be enough to satisfy value investors. These investors would prefer stable growth in the value of the company over time rather than dividends.

Bernstein analysts suggest that a split between dividends and stock buybacks would be the best solution for Apple Inc., even with the shift in the investment of its shares from growth funds to value funds.  Historically, Apple has yielded the most return based on its earnings, which are projected to be 4.3% higher than last year’s.  With a new offer on the table, Apple Inc. faces a tough decision if it wants to keep its “Outperform” rating.

By Jennifer Pfalz

 Apple Insider

Jutia Group

Value Walk

Hedge Accordingly

 

 

 

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