These 2 Likely Announcements Will Drive Apple Inc. Significantly Higher

Apple (NASDAQ: AAPL  ) shares have found stability after a rough patch of trading in late 2012. One of the key reasons for this recovery has been aggressive programs to return capital to shareholders. Yet, given Apple's payout ratio versus peers like International Business Machines (NYSE: IBM  ) and Intel (NASDAQ: INTC  ) , along with a long-elapsed period of time since making major modifications, we could soon receive two major announcements that will drive shares significantly higher.

Two things that Apple needs to announce
In Apple's recovery from under $400 to its current price of $536, the company's dividend and buyback have likely been most responsible for this performance. In April 2013, Apple's quarterly dividend was $2.65 and its stock price was $390. Then, in May it raised the dividend to $3.05, and the stock began to trade higher.

The company also implemented a $60 billion buyback program. Furthermore, after its disappointing first-quarter 2014 earnings report, Apple spent $14 billion of this buyback in a two-week span, which helped to boost shares from under $500 to over $540. To date, all but $20 billion of the buyback program has been spent.

With both things considered, Apple needs to, and very well might, announce a higher dividend and a larger buyback program as investors await the company's new product cycle.

Why the dividend?
In retrospect, Apple should increase its dividend and likely will because its current payout is poor relative to its peers.

Company

Operating Margin

Dividend Yield

Payout Ratio

Apple 

28.3%

2.3%

29%

IBM 

20.4%

2%

25%

Intel 

23.7%

3.5%

48%

The above chart shows Apple compared to its top peers -- all of whom trade at 13 times earnings -- in terms of the amount of annual profits that are paid in dividends and how much profit is earned from each company's operations. This is important as high, sustainable margins are necessary to ensure that a company's payout ratio isn't too high relative to its dividend. Hence, companies that earn higher profits can afford to pay larger dividends without it weighing too heavily on its future operations.

For example, Intel pays a 53% higher dividend yield than Apple. However, its payout ratio is 66% higher due to Apple having higher operating margins. With that said, Apple's operating margin declined from 35.3% in 2012 to its current 28.3% in the last 12 months, which might explain why the company didn't make any changes to its dividend in the last year. Hence, Apple wanted to ensure that it could easily afford a higher dividend.

However, Apple's margins are now showing stability, and are expected to remain stable over the next year. Therefore, it seems logical, if not probable, that Apple will increase its dividend soon, which will be a key catalyst for the stock.

Why the buyback?
In regards to a buyback, Apple is nearing the end of its $60 billion program, and despite this payout, the company is still accumulating cash quickly. Currently, Apple has $160 billion in cash, and during the last 12 months has created $53 billion in operating cash flow. Thus, it has the money for a larger buyback program.

As an investor, a larger buyback program is imperative, and if you need proof, just ask IBM investors. During the last five years, IBM has cut its share count by 20% due to high buybacks, which has driven its EPS higher as a result.

With that said, IBM's revenue during this period has been essentially flat. Yet, its stock has doubled, something we can only attribute to an aggressive buyback program. Already, Apple has cut its shares outstanding by 5%, which has increased as a percentage due to the buybacks following its first-quarter report and the likelihood of further buybacks in the last two months.

Given the company's success with its buyback program, its mounting cash position, and activist shareholders like Carl Icahn pressing hard for a larger program, investors should anticipate a larger buyback announcement, which could come in this upcoming earnings release as the current program ends.

Final thoughts
When you look at the benefit of a higher dividend and large buyback program, combined with the amount of cash that Apple has on hand, it seems almost certain that the company will boost both programs in the near future.

If so, investors should like the chances of Apple trading higher, and at only 13 times earnings, the stock is cheap and presenting a solid investment opportunity.

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Read/Post Comments (9) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 01, 2014, at 2:16 PM, jdmeck wrote:

    I don't agree. They should raise the dividend, but enough with the buybacks. It's time to do something more constructive with the money.

  • Report this Comment On April 01, 2014, at 4:47 PM, AceOfSaves wrote:

    @jdmeck

    Can you please cite what constructive things at the moment that Apple can do with their money that are better than buying back their stock at bargain prices?

    I love that they are buying back their stock right now because they will be worth more when the price goes up after new products are released. It's not a matter of "if" but rather a matter of "when", and all signs point this year.

  • Report this Comment On April 01, 2014, at 8:02 PM, annaarron wrote:

    Apple repurchased more than $22 billion worth of shares in fiscal year 2013, and the company expects to return $100 billion to shareholders by 2015 for more info http://goo.gl/p6k4c4

  • Report this Comment On April 01, 2014, at 9:10 PM, iphonerulez wrote:

    How about Apple doing something constructive with its money like something to help boost the share price or help boost its revenue? Something constructive that won't make Apple's share price look like a laggard even behind Hewlett-Packard and Microsoft. How about Apple getting itself a search engine or start some cloud services like many other companies do to tack on some quick revenue. Apple's iPhone business is completely capped by Android so Tim Cook had better look around for others ways to add revenue to the company. And it all starts with using some of that idle $160 billion reserve cash pile.

  • Report this Comment On April 01, 2014, at 11:22 PM, singaporenick wrote:

    Share buybacks do not guarantee a share price rise.The author cited IBM to prove his point,one can could just as easily cite Exxon Mobil which has had a large buyback programme yet a share price fall,so a double waste of shareholders money.

    I for one hope Apple cease the buyback programme and increase the dividend.

  • Report this Comment On April 02, 2014, at 1:43 AM, LeadGoat wrote:

    "disappointing first-quarter 2014 earnings report"

    Wow, what was it? Third highest in history?

  • Report this Comment On April 02, 2014, at 7:26 AM, Cintos wrote:

    Bybacks and Dividends get my vote. All this talk about "doing something constructive with its money" begs the question of which side of they trade you are on. I am certain that the Netflx investor is pushing hard for Apple to spend $21 Billion + a big premium to "snag" it. Lots of examples of Google and Facebook spending absurd dot.com bubble prices for $10.00 on the penny.

    The new model of Capitalism seems to be to "grow" - whatever that means - and MAKE NO MONEY. Sounds like socialism to me, but that is where Mr. Market is trending.

  • Report this Comment On April 02, 2014, at 7:33 AM, Mathman6577 wrote:

    Although I'm a long-time Apple bull I think in addition to the financial engineering the company needs to come up w/ a new product category. A bigger iPhone screen and China Mobile will not be the whole answer.

  • Report this Comment On April 02, 2014, at 8:31 PM, danialwilson wrote:

    Apple Inc. is planning to acquire stake in Renesas Electronics Corporation’s subsidiary, Renesas SP Drivers, which produces display-related chips for smartphones and tablets. And here is why http://goo.gl/vUHDLm

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