Technology giant Apple yesterday handed shareholders a $100 billion sweetener, as it again reported lower margins and failed to ignite shareholders' fancy, despite improved sales of its popular iPhone and iPad devices.
Apple shares have recently come under pressure, as the market has started to see the company as ordinary and lacking innovation. Its second quarter results were released yesterday, after the market closed, and its share price lost 0.54%, to $403.95, in after-hours trade.
Over the past six months, stock in the company has declined by more than $600 a share. During the first quarter of the year, despite posting record revenue, its shares lost 9.77% after the numbers were released, dropping below the $500 mark for what was then only the second time in several months.
Apple's profit curve has hit the slowing stage, indicating the current era of the technology giant being the blue-eyed boy of the technology investment market is coming to an end.
Strong sales
In the three months to March, Apple posted revenue of $43.6 billion and net profit of $9.5 billion, or $10.09 per diluted share. In the second three months of 2012, it reported revenue of $39.2 billion and net profit of $11.6 billion.
Its gross margin has dropped to 37.5%, compared with 47.4% a year ago, although it is still one of the highest in the sector. Three months ago, it said revenue would be between $41 billion and $43 billion, and gross margin to between 37.5% and 38.5%.
Apple sold 37.4 million iPhones in the quarter, compared to 35.1 million in the year-ago quarter. It also moved 19.5 million iPads, compared to 11.8 million in the year-ago quarter. Mac sales were flat at just under four million.
Vestact analyst Sasha Naryshkine says iPad and iPhone sales beat expectations, and although margins were a little lower than everyone expected, earnings were a touch better than expectations and sales were higher than anticipated. He points out iPad sales outnumber Microsoft Surface shipments, which have been sluggish.
Apple has also promised more innovation. CEO Tim Cook said in a statement: "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."
Cook's reassurance was not enough to appease people who want to see amazing products yesterday, and ones that the blow the socks off everyone, says Naryshkine.
"Initially, the stock reacted positively to the numbers, but then the conference call revealed that new products are probably going to be released in the fall, and then all through next year. Sounds like only a few months away."
Absa Investments analyst Chris Gilmour says, while the results are reasonable, there is no indication of headline-grabbing products on the way, and Apple needs something "spectacular".
Bribing shareholders?
Amplifying the company's break with former - and deceased - CEO Steve Jobs' no dividend policy, which it reversed last year, after six years without returning cash to shareholders, the company said yesterday it would return $100 billion to stock-holders by the end of 2015.
This is a $55 billion increase to the programme announced last year, and translates to an average rate of $30 billion a year from the time of the first dividend payment in August 2012 until December 2015, Apple said in a statement.
As part of the programme, Apple will buy back stock worth $60 billion-$50 billion more than it initially budgeted for last year. "This is the largest single share repurchase authorisation in history and is expected to be executed by the end of calendar 2015."
Apple also approved a 15% increase in its dividends. "Apple is among the largest dividend payers in the world, with annual payments of about $11 billion."
Tons of cash
Naryshkine says Apple's increased payouts have boosted its per share yield to 3%, putting it on par with Microsoft. "There are not many tech stocks at that sort of yield."
However, the company, which ended the quarter with $145 billion in the bank, also announced plans to borrow, and said it would give further details at a later stage. Naryshkine explains that two-thirds of Apple's sales are offshore and if it repatriated the money to return to shareholders, would face a "large whack of tax", which is why it makes sense to borrow.
Although Apple shares have lost ground in the last six months, over the past five years, the share is up 150%, says Naryshkine. He adds that Vestact is currently a buyer of the stock.
Investors have a short-term focus, says Naryshkine and, while Apple may be seen as ex-growth, it is likely to have new products in the pipeline and is still selling a lot of products that people want.
However, Gilmour says Apple should be reinvesting for future development needs. He says while the payout is nice for shareholders, it suggests Apple feels it cannot invest the $100 billion any better than shareholders can. "To an extent, it's an admission of failure."
He points out that Apple has not innovated in some time, but has instead updated its range.
Naryshkine says Apple's cash pile represents just 38% of its market capitalisation, which is currently $381.4 billion. He notes the return to shareholders is only around three years and three months' worth of cash generation for the company.
"We are very fortunate to be in a position to more than double the size of the capital return programme we announced last year," said Cook. "We believe so strongly that repurchasing our shares represents an attractive use of our capital that we have dedicated the vast majority of the increase in our capital return programme to share repurchases."
Naryshkine points out that Apple sees its share price as cheap, which is why it is buying back $60 billion - or almost 16% - of its stock. Gilmour says the buy back and increased dividends are a sweetener to shareholders to stay invested.
CFO Peter Oppenheimer says Apple is generating more cash than what it needs to operate the business, invest in its future, and maintain flexibility to take advantage of strategic opportunities.
Apple's outlook also disappointed a little, and was perhaps too cautious, with gross margins expected to be between 36% and 37%, and revenue between $33.5 billion and $35.5 billion, says Naryshkine. He says that should translate to lower earnings per share.
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