How Effective is Apple's (AAPL) Capital Distribution Program?

Apple (Shutterstock photo)Apple (Shutterstock photo)

Apple (AAPL) shocked the market last week, delivering not only a top- and bottom-line beat when delivering its fiscal third quarter financial results, the tech giant provided strong fourth quarter guidance, effectively killing rumors that it would delay the launch of its highly-anticipated iPhone 8.

The Cupertino, Calif.-based company said it expects fourth quarter revenue to be in the range of $49 billion to $52 billion, topping Street expectations for $49.1 billion. The market applauded Apple’s results and the better-than-expected outlook as shares Apple shares soared 6.5% to an all-time high of $159.75. And, in the process, Apple exceeded a market cap of $800 billion.

The headline numbers, meanwhile, weren’t the only thing to be excited about. The market ignored how massive Apple’s capital distribution program — often taken for granted — has become. Apple’s Board padded the company’s capital return program by $50 billion, while extending the distribution timeframe by four quarters.

Analysts have asked whether that is that the best use of Apple’s cash.

With the company’s cash war chest now at around $260 billion, the market has always had its hand in Apple’s pocket, pleading for it to make a large purchase. Netflix (NFLX), Tesla (TSLA) and Disney (DIS) are often the names thrown around that many analysts believe Apple should go after. In lieu of these purchases, Apple has, instead, focused on growing its business organically, while using its massive cash flow to fuel its capital return program.

Apple, which in the Q3 returned almost $12 billion to investors via dividends and buybacks, not only just raised the stock buyback program form $175 billion to $210 billion, it also raised the quarterly cash dividend by 10%, to 63 cents per share. As it now stands, the company will fork over some $300 million (buybacks and dividends combined) by the end of March 2019.

Obviously, this makes Apple, which first began returning cash to shareholders in August of 2012, one of the more generous payers on the market. I say that knowing full well that its current dividend yield of 1.62% is below the 2.00% average yield of the SP 500 index. But it would be a mistake to assess the effectiveness of Apple’s capital return program solely by yield.

The company has taken some 20% of the float off the market just in the past five years. And if you’ve held Apple stock during that span, you’re up almost 80%. Aside from helping to stabilize the stock price, which prior to the buybacks, were extremely volatile, Apple’s purchases have seemingly been well-timed and executed — more often than not — when the share price was undervalued.

Is that still the case with Apple stock — up 35% year to date — currently trading near all-time highs? To put it more clearly, does buying back stock at these levels still make sense for Apple?

The company, as evidenced by its strong Q4 guidance, continues to bet on itself and is operating on all cylinders. Wall Street has responded with ratings upgrades, while increasing Apple’s price targets. And from an investor’s perspective, seeing how effective Apple’s capital distribution program has been in the past five years, why would you not have your hand out and say thank you?


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