After the initial knee-jerk positive reaction in the after hours on Tuesday, it seems that the lowered third quarter guidance from Apple Inc. (NASDAQ:AAPL) is the point that investors are dwelling on. In my opinion, the confidence displayed by Apple Inc. (NASDAQ:AAPL)’s actions is more important than any of the numbers (which were pretty good, by the way).
Apple’s Quarterly Report
By far the most significant (and unexpected) part of Apple’s quarterly report was the announcement that the company is increasing its share buyback program from $10 billion to $60 billion. A few weeks ago, I wrote an article discussing the various rumors that have been circulating regarding the company, and I discussed three ways Apple Inc. (NASDAQ:AAPL) could have put their cash to better use: dividends, buybacks, and acquisitions. Issuing “i-Preferred” shares or some of the other suggestions were never really on the table.
A higher dividend is nice, as it creates a “price floor” effect. As the share price of a high dividend stock drops, at some point the yield will become so high as to attract new investors. At $400 per share, Apple currently pays around 3%, including the dividend increase announced with the recent report. If shares were to fall to say, $300, Apple would yield over 4%, and serious income investors would find the stock much more attractive. However, the dividend does nothing to increase the intrinsic vale of the stock, and is not the best way to return more capital to investors.
Thankfully, Apple Inc. (NASDAQ:AAPL) was thinking the same way, and as Tim Cook put it, “We concluded that investing in Apple was the best.” The buyback increase is much more significant than it seems. By increasing the buyback to such an unprecedented level, Apple is telling the market, “our shares are so cheap at these prices, that the absolute best way that exists to use $50 billion in cash is to buy some of our own stock at this amazing discount.”
How big is the buyback? At $400 per share, a $60 billion buyback equals 150 million shares, or almost 16% of the entire float. This is a tremendous amount, especially considering the company intends to complete this in just over two and a half years, by the end of 2015.
No New Products until fall: A Good Thing?
Certain companies, such as Google Inc (NASDAQ:GOOG) like to hype their products well in advance, letting consumers know exactly when the next big thing will be available. With the Google Glass, they are even doing a test run, releasing a small number of their new devices on the market to create more anticipation. This can work just fine, but it causes their stock to move well in advance of anything actually happening.