Why Apple’s Dividend-Buyback Program Won’t Even Dent its $100 Billion Cash Hoard

Apple’s (AAPL) new dividend plan and its track-record of huge share price gains generated the biggest love-fest Wall Street has bestowed on a company in a generation. It’s a nice party, but it also seemed like a challenge. So we used YCharts’ reams of data to look for a metric that might give investors a little pause before grabbing up Apple shares. Here’s what we found.

Because Apple’s plan calls for giving away $45 billion over three years, we first considered what such generosity will do to the company’s balance sheet. The $10.60 per share annual payout will put the Apple dividend yield at 1.8%. Another $10 billion for buying back shares brings the average annual spend for the program to about $15 billion. That’s all hunky for shareholders unless the cost eats into funding for research and development and other necessities for share price growth.

But it looks like Apple will be replacing that cash rapidly. Very rapidly. Last year, Apple’s free cash flow flow alone would have almost paid for the entire three-year program. And in the meantime, the nearly $100 million in cash and investments on the balance sheet can cover Apple’s program should free cash flow isn’t enough.

Apple Free Cash Flow TTM Chart

Apple Free Cash Flow TTM Chart by YCharts

Dipping into that cash won’t be necessary at all if Apple’s earnings per share remain some three times the price of the dividend. Actually, there’s no dipping required if Apple’s earnings just stay safely north of 2010 levels.

Apple Earnings Per Share TTM Chart

Apple Earnings Per Share TTM Chart by YCharts

Can Apple shareholders continue to expect wild share price growth? Apple’s revenue growth has long been the main attraction for investors. Until Monday, initiating a dividend payment was code for slower growth ahead. (Apple denies any such link in its decision.) But the company’s share price is up more than 165% in two years mainly because its revenue growth is up almost that much, so the question of how long it can continue is important.

Apple Revenue Per Share TTM Chart

Apple Revenue Per Share TTM Chart by YCharts

Past revenue growth alone isn’t a great indicator of the level of future success, but sequential years of it builds confidence that the company knows how to use its money wisely. Apple’s return on invested capital, a measure of how much it earns from shareholders’ money, is a whopping 47%. That’s more than double the return of other mega-cap stocks. Only International Business Machines (IBM) has come close.

Apple Return on Invested Capital Chart

Apple Return on Invested Capital Chart by YCharts

Apple’s returns are superior for two reasons: it creates great products and sells them at great profits. Unlike, say, Amazon.com (AMZN), Apple sales come with commensurate profits. In fact, Apple’s operating profit margin have been widening.

Apple Operating Margin TTM Chart

Apple Operating Margin TTM Chart by YCharts

Which brings us to that $600 current share price, an all-time high. Is it worth it? Apple has spent most of its life trading at higher valuations, and no one who bought shares in the past would argue that they paid too much.

Apple Price / Sales Ratio Chart

Apple Price / Sales Ratio Chart by YCharts

The YCharts Stock Screener shows that a price/sales ratio above 4 is rare in a company worth tens of billions of dollars and unheard of in anything near Apple’s market cap of about $550 million. Sustaining it will require continuing growth that’s a lot easier at smaller companies. Even a blockbuster sales run – like the 3 million new iPads sold over three days last week – doesn’t do a ton for the totals when you have about $128 billion in revenues annually.

Yet it’s hard to find anyone who believes Apple’s growth story will end soon. Income fund managers are gleefully buying Apple shares now that the dividend makes such an investment possible. Investment analysts spent Monday revising their target share prices up to between $700 and $800.

YCharts offers hundreds of other ways to run Apple data. Take a crack yourself.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings, stock screener and portfolio strategies.



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