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When Getting $50 Billion From Apple Still Isn't Enough

By Evan Niu, CFA - Apr 24, 2013 at 5:45PM

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Apple just unveiled a massive capital return program last night, yet investors seem to be left wanting more. Why wasn't a $50 billion increase in repurchase authorization good enough?

Over the past couple of months investors have been calling for increased returns of capital from Apple (AAPL -1.92%). The inevitable announcement of what the Mac maker would do with its disproportionate cash position was seen as the nearest positive catalyst on the horizon. In some ways, the capital return program that was unveiled last night delivered in spades, boosting the share repurchase authorization by a mind-boggling $50 billion.

And yet, shares were weak today and off modestly. Why was $50 billion not enough to satisfy investors?

We want more!
It would appear that perhaps investors were hoping for more of a direct dividend boost as opposed to the overwhelming emphasis on repurchases. The aggregate amount of capital being returned more than doubled, from $45 billion to $100 billion, but most of that increase was being plunged into the repurchase authorization.

Apple's quarterly dividend received a relatively modest boost of 15% to $3.05 per share. That translates into an annual payout of $12.20 per share, or approximately a 3% yield. That's a respectable yield by any measure, but possibly not enough to impress income-oriented investors.

As Apple matures, the composition of its investor base will naturally shift from growth-seekers to income-seekers, a painful process that's currently under way. The growth-seekers have been hitting the exits for the past seven months as growth rates decelerate in part due to the sheer size that Apple has achieved. With over $169 billion in trailing-12-month sales, Apple's five-year average revenue growth rate of 44.8% simply isn't in the cards anymore.

Investors may not fully appreciate the effects of increased repurchases until later, as the accretive impacts on earnings per share take time to gradually materialize. Make no mistake: Apple's repurchasing will be accretive because shares outstanding will shrink.

The only way that buybacks don't accrete to Apple's EPS is if they only offset dilution from equity compensation, assuming it doesn't conduct any other type of dilutive capital offerings (I don't think Apple needs to raise any secondary offerings anytime soon). It's not like Apple is doling out $50 billion of share-based compensation to employees through 2015 (it's only given out $2.7 billion total over the past year).

In comparison, investors absolutely appreciate direct dividend payouts since that's money they can spend. Even though the new yield is rock solid, some income investors still might be sitting on the sidelines. Still, Apple investing in itself, particularly at current prices, is the best use of its cash.

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