36 Billion Reasons to Like Apple

When Apple (NASDAQ: AAPL  ) released its quarterly earnings earlier this week, the focus was almost exclusively on a small handful of metrics and how they compared to the market's expectations. While measures like revenue, earnings per share, and the number of iPhones and iPads sold are critically important, there is another reason to invest in Apple that often gets overlooked by investors: the tremendous capital return program that the company has commenced.

A two pronged approach to rewarding shareholders
Back in April, Apple announced a plan to return $100 billion to shareholders by the end of 2015 through expansion of the company's dividend and share repurchase programs. Despite being the largest return of capital in history, the market essentially yawned at the news. However, shares of Apple have almost tripled the performance of the S&P 500 and have outperformed peers including Google (NASDAQ: GOOGL  ) and Microsoft (NASDAQ: MSFT  ) since the announcement as shown below:

AAPL Total Return Price Chart

AAPL Total Return Price data by YCharts

36 billion reasons for Apple's performance
While iPhone sales estimates and speculation of iWatch, iTV, and other products drive the movement of Apple's share price each day, Apple's program to return capital to shareholders is producing results behind the scenes.

Over the past year, this program has resulted in $10.6 billion in cash paid to shareholders and $22.9 billion in cash paid to repurchase shares for a total of $33.5 billion over the past twelve months and a cumulative total of $36 billion since Apple began paying a dividend. That is simply a huge number; as a frame of reference, $36 billion is more than the total market capitalization of fellow top 10 stock National Oilwell Varco, or the GDP of Panama. 

What is even more impressive than returning $33.5 billion to shareholders on a path to return at least that much in each of the next two years is the fact that Apple's balance sheet is as strong as ever. Below is a comparison of Apple's net cash position over the past year:

  September 29, 2012 September 28, 2013
Cash and equivalents  $10,746 $14,259
Short-term marketable securities 18,383 26,287 
Long-term marketable securities 92,122  106,215 
Long-term debt (16,960) 
Net cash $121,251  $129,801 

Source: Apple Q4 earnings release, figures in millions 

That is not a mistake. Apple not only returned $33.5 billion to shareholders during the past year, but also increased its net cash position by over $8 billion.

What does this mean for shareholders?
While shareholders understand that Apple's quarterly dividend payment of $3.05 per share translates into a 2.3% dividend yield based on Apple's current share price, what is often underappreciated is the power of the share repurchase program.  Over the past year, Apple has reduced the number of shares outstanding by 40 million, or over 4% of total shares outstanding.

As a result of the shrinking base of shares outstanding, each share of Apple owns a slightly larger percentage of the company and therefore boosts earnings per share. Unlike dividends, this buyback provides value to shareholders with no income tax implications.

The return of over $33 billion to shareholders over the past year without putting a dent in Apple's sizable net cash position is particularly impressive compared to Google and Microsoft.

Google, which is still growing at a faster rate than Apple, has yet to reach the stage where it has begun to return capital to shareholders via dividend or share repurchase.

Microsoft, which has quickly gained a reputation as an "income investment" thanks to a healthy dividend and share buyback program, has returned $12.9 billion to shareholders in the past year. While $12.9 billion is certainly a sizable return of capital for Microsoft investors, these returns are much lower than Apple's capital return even on a size-adjusted basis.

Looking ahead
Despite the launch of an unprecedented campaign to return capital to shareholders, Apple has demonstrated that it can continue to increase its cash position thanks to its tremendous cash flow. Since Apple's net cash continues to increase, there's a strong possibility that the capital return program will be further increased in the next couple of years.

This significant source of value creation for shareholders should be given adequate attention when making an informed decision about an investment in Apple, and will be a significant reason that Apple will continue to outperform the market.

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