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Apple Inc. (AAPL) Endures The ‘Muddle-Through’ Period

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There was perhaps no more important quarterly report obsessed over by analysts and investors than Apple Inc. (NASDAQ:AAPL)‘s. The technology giant, which was once the world’s most valuable publicly traded company, sorely needed to provide the market with some good news. Its shares have been battered over the past year, and investors needed a shot in the arm.

Unfortunately, there probably wasn’t enough in Apple’s report to completely calm investors’ nerves. At this point, it’s worth providing an overview of what the company had to say, in order to more effectively paint a clearer picture of where the company is heading.

Profit falls, margin contracts (as expected)

The pervasive fear surrounding Apple Inc. (NASDAQ:AAPL) and its precipitous drop over the past year has centered around declining profit margins, and consequently, declining profits. Apple faced extremely difficult comparisons this quarter, as the company had no new product released recently to propel the stock. In addition, investors were understandably disappointed by the revelation that Apple likely won’t release any new products until 2014.

These same concerns caused QUALCOMM, Inc. (NASDAQ:QCOM) to fall more than 5% on the day of its own quarterly report. While Qualcomm announced fiscal second-quarter revenue that beat expectations, it wasn’t enough to prevent the stock from dropping heavily. Analysts attributed the drop to familiar concerns for Apple Inc. (NASDAQ:AAPL) investors: that the push toward cheaper phones will result in lower margins and lower profits, which is largely behind QUALCOMM, Inc. (NASDAQ:QCOM)’s dour outlook for the third quarter.

For the quarter, Apple reported 10% lower revenue and 18% lower profit as opposed to the same period last year. This was in conjunction with the company revealing its profit margin had contracted by almost 10 percentage points year over year.

Shareholders get rewarded

For several months now, many Apple Inc. (NASDAQ:AAPL) investors (myself included) have pushed for the company to return a portion of its massive cash hoard to its shareholders in the form of increased dividends and/or share buybacks. Apple truly has a mountain of cash on the books; the company’s cash position increased further during the quarter, from $137 billion to $145 billion.

Apple Inc. (AAPL)Fortunately for us, Apple delivered: the company announced a 15% increase to the common stock dividend and the company’s board has increased its share repurchase authorization to $60 billion from the $10 billion level announced last year. This is the largest single share repurchase authorization in history and is expected to be executed by the end of calendar 2015.

In total, Apple Inc. (NASDAQ:AAPL) will more than double its level of capital returns going forward. To finance these programs, Apple will rely on new borrowings. On the day of its earnings report, it was announced that Apple had been given a debt rating of AA+ from Standard and Poor’s, representing the same credit grade as the United States.

The decision to utilize debt to finance these shareholder rewards programs makes a lot of sense. Apple currently holds more than $102 billion of its $145 billion cash pile overseas, meaning the company would be subject to severe tax liabilities should it decide to repatriate the cash to fund its dividend and share repurchases.

Moreover, because interest rates are at historic lows, a company with a credit rating as high as Apple would be foolish to not take advantage of extremely attractive financing.

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