When the company reported earnings earlier this month, Apple (NASDAQ:AAPL) announced it was adding another $50 billion to its capital return program, focusing heavily on share repurchases. In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu discuss Apple's cash position and new standing as the world's largest dividend payer.
A full transcript follows the video.
This video was recorded on May 5, 2017.
Dylan Lewis: I think one place that the company has been super clear, though, is its capital return program. They obviously made some new announcements related to that. Do you want to touch on that, Evan?
Evan Niu: Every March or April, basically this fiscal second-quarter earnings, this is now, every year, this has become the traditional schedule, that's when they provide updates to the capital return program. This year, the update was pretty in line with previous years. It's a total increase of about $50 billion, and they're allocating most of that to share repurchases. About $35 billion is going toward share repurchases, the other $15 billion going toward dividends. Their shares repurchase authorization is going from $175 billion to $210 billion. To date, they've purchased right about $151 billion. They have about $60 billion of authorization that will last them until next year. And the overall size of the increase this year is pretty much in line with historical standards, yet, at the same time, their cash continues to grow to ridiculous, unheard-of levels. On a gross basis, they're now sitting on over a quarter-trillion dollars in cash. Of course, the vast majority of that is overseas, and that's before you factor in the net debt they've been raising. They actually just raised more debt this week. But, they have so much cash, and even though they're very aggressive at giving it back, they generate it so fast that they still add to their pile of money every quarter. Of course, the big challenge with trying to do more with that is the whole repatriation thing. Maybe the Trump administration will actually have some type of holiday. There's been a lot of talk about that. But at this point, it's still pretty uncertain, if that will happen sometime. If there is a one-time repatriation deal, either deemed repatriation or a one-time thing, I do think Apple would take that opportunity to bring quite a bit of cash back. But, at the same time, I think we have to acknowledge that the majority of their capital needs are actually outside of the U.S.
Lewis: Because that's where a lot of the manufacturing and all the tooling is, right?
Niu: Right, that's a big piece of it. The majority of their capital expenditures is for product and tooling equipment. This equipment is installed at contract manufacturers in Asia. It's their equipment, but they are putting it in their partners' facilities, which are all located international. Plus, on top of that, in terms of retail store expansion, the U.S. retail network for Apple stores is already pretty mature. Over the past few years, they've been really focusing on growing the footprint internationally. Those stores are pretty expensive, especially when you think about how nice Apple makes the stores. They use really high-quality materials. They put a lot of money into their stores because that's the way they want to make the experience. So, between increasing retail footprint internationally and the fact that the majority of the capital expenditures are concentrated in Asia, they do need to keep quite a bit of money out internationally. But, obviously, they don't need anywhere near $230 billion internationally, that's just ridiculous. So, I do think there's an opportunity to bring some back if you get a repatriation holiday. Maybe, as far as what they would do with it, pay down some of the debt to restrengthen the balance sheet, maybe a special, one-time dividend. I'm not a fan of the whole "make a huge blockbuster acquisition" idea, which some people like to talk about. I think that would be kind of irresponsible. But, we'll see what happens. It really hinges on this idea of a tax repatriation, because that would allow them to really bring back more and either give it back or do something more productive with it.
Lewis: Yeah, I think that will probably be one of the biggest stories to watch in 2017 for Apple and the Trump administration. You touched on the dividend a little bit. It's worth noting here, they did boost their quarterly dividend payment 10.5%, it is now $0.63 per share. Now, Apple is the world's largest dividend payer, it just passed ExxonMobil, which is just another fun tidbit about the scale of their business and how quickly they are printing cash.
Niu: Yeah, I think they're estimating it at $13 billion a year, which is the size of medium-sized companies, just in dividends.
Lewis: Yeah. Evan, anything else before we switch things over to Facebook, on Apple? It seems to me like this kind of a humming-along, boring quarter for this company. A lot of the intrigue for Apple in 2017 would come with a tax repatriation holiday, or when they actually show what the next model of the iPhone looks like. So, it's kind of a wait-and-see quarter for investors.
Niu: Yeah, this quarter seasonally isn't really too exciting. Obviously, the fourth quarter, the holiday quarter, that's where the more exciting stuff comes in. So, yeah, I agree, it's kind of more of the same, executing very well. I think the services piece is probably the most important thing that we talked about. Other than that, overall, a pretty solid quarter.
Dylan Lewis owns shares of Apple, ExxonMobil, and Facebook. Evan Niu, CFA owns shares of Apple and Facebook. Evan Niu, CFA has the following options: long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Apple and Facebook. The Motley Fool owns shares of ExxonMobil. The Motley Fool has a disclosure policy.