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March 19, 2012

Apple to spend cash on dividends and share repurchases

The speculation is over. Apple has announced that it will give a quarterly dividend of US$2.65/share starting from fourth quarter of 2012 (September quarter). The company will also use US$10bn for share repurchases.

Combined the dividend and the share buyback will involve an expenditure of US$22.4bn till Sep 2013.

Let consider what impact this will have on Apple by Sep 2013.

Current cash position
As we can see in exhibit 1, Apple currently has US$97.6bn of cash and cash equivalents and generated a phenomenal US$9.5bn per quarter in CY 2011. We will use this average for the next 7 quarters, which is in line with equity research analysts estimates.

For ex. Wedbush expects Apple to generate US$79.2bn in the next 7 quarters, J.P.Morgan US$64.7bn and Barclays US$63.8bn against our estimate of US$66.3bn.

Dividends impact
US$2.65 per share implies a quarterly dividend of US$2.5bn. This means that till Sep 2013 Apple will incur an expenditure of US$12.4bn.

Share repurchase
Apple has also said that it will spend US$10bn to buyback shares starting from 2013.

So, including dividends and share repurchase Apple will spend US$22.4bn till FY13.

Estimated cash position in FY13 (Sep 2013)
By now you would have realised that potential cash generated in the next 7 quarters is three times the proposed expenditure. So in spite of the announced dividends and share buyback, Apple's net cash position will increase by US$46.4bn by Sep 2013.

The measures announced today are a good start but they are insufficient. While Apple has every right to continue holding cash, returns on cash is going to be low and will drag down ROE.
We think that Apple can do the following to further improve cash utilisation:
  • Dividend: Eventually increase the dividends per share; Potential to change interested shareholder class
  • Buyback: A good tool, improve ROE while not giving a long term commitment like in the case of dividends
  • Acquisitions: This is an area where Apple will need to tread carefully. There are not too many opportunities available where Apple can get as high margins with as much customer loyalty as it is currently enjoying. Apple will need to weigh returns versus long term potential and strategic benefits
  • Patents: Acquiring patents (like that of Nortel) will help Apple in the long term, even if the benefits are not evident immediately
Still Apple should be proud of having this headache, after once coming very close to bankruptcy. A great turnaround indeed!

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