Apple: What the Dividend Hike and Buybacks Mean

Okay, so Apple (AAPL) didn’t pull a Microsoft (MSFT) and come in with a positive earnings surprise for the first quarter. The news from Cupertino was a near 18% drop in earnings on revenue growth of 17% compared to a year earlier. Still, that was slightly ahead of analyst expectations. The stock initially rallied to $426 in after-hours trading but then had settled back to $404 later in the session.

If you believe $400 a share is beginning to look like a floor, Apple is offering an interesting deal. Tim Cook conceded that we won’t be getting any game-changing product releases until the fourth quarter and into 2014. From the official release: “Our teams are hard at work on some amazing new hardware, software, and services and we are very excited about the products in our pipeline.”

But in the meantime, buying in at today’s price will give you a 3% dividend yield, as Apple also announced it will be raising its quarterly dividend 15% to $3.05. That 3% is 50% higher than the yield on the S&P 500.

Apple also said it plans to increase its stock buybacks to $60 billion through the end of 2015; a steep upgrade from the $10 billion plan announced last year. For the record, Apple has spent $1.3 billion on buybacks over the past 12 months.

At Apple’s current price a $60 billion buyback would sop up nearly 148 million shares, or nearly 15% of current shares outstanding.

AAPL Shares Outstanding Chart

AAPL Shares Outstanding data by YCharts

But as the chart below shows, even despite recent stock buybacks, Apple’s shares outstanding count is still higher than a year ago. That’s a function of having to issue new shares as employees exercise options. Over the past five years Apple’s share count has increased 6%. So it’s unlikely there will be a net 15% reduction in outstanding shares. Still, if Apple follows through on the plan, it should have a meaningful impact for shareholders. If the net share reduction is just 3% a year through 2015, that could translate into a net payout yield of 6% using an anticipated dividend yield of 3%. That’s nearly four times the current level.

And all of that for a fire-sale PE ratio.

AAPL PE Ratio TTM Chart

AAPL PE Ratio TTM data by YCharts

In the first quarter that was cheap enough to finally get the attention of one of the finest value managers, Brian Rogers, manager of the $27 billion T. Rowe Price Equity Income fund, (He’s run the portfolio for nearly 30 years.) According to GuruFocus.com, Rogers added Apple to his 100-stock portfolio earlier this year; it represents about 0.57% of the fund’s assets.

While there’s no guarantee that Apple’s next new thing(s) will restore the company’s mojo, in the meantime you can buy into a very cheap stock that will pay you to be patient with rising dividends and stock buybacks.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

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