Apple (AAPL 0.39%) has recently augmented its capital-return program while also increasing its revenue and earnings. The aggressive return of capital by Apple is similar to what IBM (IBM 1.56%) has done in the past couple of years. Apple's management and board believe its stock is undervalued and many traditional metrics support the company's assertion. Furthermore, its stock appears to be undervalued relative to the market and in comparison with that of its competitor Google (GOOG 2.27%), the originator of Android.
Apple is becoming more like IBM for the right reasons
Apple's generous capital-return program makes it like IBM, but growth is where Apple differentiates itself from the information technology and services company. IBM has realized less revenue in the past couple of years, but its income has increased considerably and its EPS has increased even more. IBM's revenue has decreased by a little under 1% per year on average over the last five years, but its income has increased by a little over 3% on a comparable basis and its EPS has grown by 15% on average over the same period. IBM has achieved this by selling lower-margin divisions and repurchasing its shares.
Apple's aggressive program to return $130 billion to its shareholders through 2015 by repurchasing $90 billion worth of its shares and increasing its dividend by 8% could have the same effect as IBM's practices. If Apple's revenue increases more slowly, stagnates, or even decreases, any revenue that it does generate will be spread over a smaller and smaller shareholder base. The resulting earnings will also be spread over that smaller base, possibly negating any effects of decreases in either revenue or income with increases in EPS.
Apple is not totally like IBM in terms of growth, however. Over the past five years, Apple has grown its revenue by 39%, income by 50%, and EPS by 62%. The company increased its revenue, income, and EPS by 4.7%, 7.1%, and 15.2% in just the last quarter . Apple's share repurchases are evidenced by EPS growth of over twice that of its income, and the company is doing so on increased revenue, not nil or diminished revenue. Therefore, Apple's rich capital-return program in combination with revenue and income growth could have an even greater effect than that of IBM.
Other practices that help Apple shareholders
In addition to the capital returns, Apple avoids diluting its shareholders by repurchasing shares when it awards shares to management and its employees. The company uses about $1 billion on an annual basis for these purchases. The company is also instituting a seven-for-one stock split, which will become effective on June 2, 2014. Although this will not add value to the company on an accounting basis, it will do so on a market-valuation basis by adding a larger liquidity premium to its shares.
Investors with fewer means will be able to purchase Apple shares now as many were barred from doing so before because the company's shares were trading above $600. Apple also expects to increase its dividend on a perennial basis after the current 8% increase, opening up the stock to a slew of different investors including value, dividend, and growth investors.
Undervalued compared to the market and Google
The combination of growth with unparalleled capital returns will boost Apple's stock, which trades at a significant discount to the market with a P/E of 14 and a forward P/E of 12. This compares with the S&P 500's P/E ratio of 18 and its forward P/E of 17. Moreover, Apple is undervalued not only in comparison with the market but also with its competitor Google. Google trades at a P/E of 28 and a forward P/E of 18. So Apple has a valuation below that of Google presently and considering next year's growth.
The valuations of Google and Apple diverge on a price to cash flow basis as well. Apple's P/CF is currently 10 while Google's is almost double that at 18. Therefore, investors are valuing Google's cash flow at more than that of Apple, and they have also assessed Google's earnings today and in the next year above those of Apple.
What to expect in the future
Apple is an incredibly shareholder-friendly company like IBM, but has the financial might and growth to even overshadow the latter's rich capital returns to its shareholders. Furthermore, Apple will continue to generate significant cash in the future as its products are beloved by its users, and its ecosystem keeps Apple users on its platform. The company is also gearing up to release the new iPhone in the next couple of months, and the iPhone accounts for the largest share of Apple's profits. The shareholder-friendly policies and low market valuation should yield good returns for investors going forward.
