In the endless efforts to return capital to shareholders, companies generally aim to repurchase shares of their own common stock or they go out and pay dividends. Wall Street seems to have become not just enamored by the return of capital, but addicted to it.
Apple Inc. (NASDAQ: AAPL) is already one of the 24/7 Wall St. buyback kings for 2016. Now there is a larger call that might draw the attention of investors. It could also draw a line in the sand over how much capital should be returned, and how it is returned, to shareholders.
It seems that the investing community might be hoping for a larger dividend and a larger stock buyback announcement with earnings in April. RBC Capital Markets analyst Amit Daryanani has said that Apple could raise its stock buyback program to a new level of $40 billion to $50 billion on an ongoing basis.
Daryanani also thinks that the dividend payout rate could be raised by 10% to 15%. If accomplished, its 2% yield now could jump to 2.2% to 2.3%. His view is not just that the dividend yield would rise, but that Apple could juice its earnings per share growth by 4% or more for the current year. The consensus 2016 estimate is $9.07 earnings per share, giving Apple a price-to-earnings (P/E) ratio of 11.6 for its current fiscal year earnings per share expectation.
The real issue to consider is what this might mean for shareholders. Apple just saw three positive analyst calls late last week, all for differing reasons, but RBC stuck with Apple too. Sadly, this trend could run into some issues. Apple is not alone in having overseas capital that it cannot repatriate without a 35% penalty. That would make the capital highly expensive, unless it proceeded to issue yet even more debt to finance endless buybacks and dividend hikes.
Apple’s cash balance is steady around $200 billion, and free cash flow could approach $69 billion in 2016. Again, much of that capital is generated and held outside of the United States.
Apple now already had some $53.2 billion in long-term debt and other liabilities as of the end of calendar 2015, before its February debt offering. That compares to $17 billion in long-term debt and $20 billion in other liabilities at the end of fiscal 2013 (September year-end). Apple’s recent debt offering’s use of proceeds did admit:
We intend to use such net proceeds for general corporate purposes, including repurchases of our common stock and payment of dividends under our program to return capital to shareholders, funding for working capital, capital expenditures, acquisitions and repayment of debt.
Investors would likely cheer a massive capital return plan. That being said, or restated, it can generate problems. Apple would have more cash than any company in the world even if it committed to returning 100% of its distributable cash flow or its free cash flow each year. It likely would keep making the company leverage up its debt until (if or when) the day that corporations can bring in overseas capital without the 35% repatriation tax.
Let’s consider Apple’s return of capital history, with its first announcement coming in March of 2012 for a total return of capital (dividends and buybacks) of $45 billion over three years at the time. When that dividend announcement was made, shares peaked that year at close to $100, now on a split-adjusted basis, before falling to $60 in 2013. It was not until mid-2014 that Apple shares went back above $100, and then all the way up to almost $135 in 2015. Now shares are back close to $105.
Apple’s existing dividend and buyback plan has grown to a total return of some $200 billion. As of the end of calendar 2015, some $153 billion or so of that plan already has been paid out.
Apple shares were last seen down 0.3% at $105.30, going into the close of trading on Monday. Apple’s 52-week trading range is $92.00 to $134.54, and its consensus analyst price target is $134.08.
It remains up for debate as to whether companies should be spending loads and loads of their cash, particularly if they have to take on debt, to buy back more and more shares. The verdict remains out.