Apple (NASDAQ:AAPL) is clearly one of the most popular companies around, and everyone plays close attention to its products and innovations. This is undeniably very important, since Apple needs to sell lots of products and services to deliver growing revenue and cash flows to investors over time. However, many investors tend to overlook Apple's capital distributions, and this is a crucial factor that could have massive implications in terms of future returns.
Apple is a cash flow-generating machine
Apple is a remarkably profitable business. The company enjoys tremendous brand power, and it has a rock-solid reputation for quality, which allows it to charge superior prices for its products. In addition, management keeps operations lean and efficient, so the business has profitability levels well above those of the competition.
According to estimates by Canaccord Genuity, Apple retains a gargantuan 92% of all operating profits in the smartphone industry, while Samsung (NASDAQOTH:SSNLF) comes in second, with 15% of profits. Based on these calculations, Apple and Samsung together account for more than 100% of industry profits because other industry players are actually losing money at the operating level.
This profitability is translated into big cash flows for investors. Through the year ended in September, Apple brought in $81.3 billion in operating cash flow, which represents nearly 35% of revenue during the period. Importantly, operating cash flow grew 36% year over year. By comparison, Samsung produced only $14 billion in operating cash flow in the first half of 2015, a decline of 25% from the same period last year.
Apple has relatively low reinvestment needs, capital expenditure absorbed $11.6 billion during the year, leaving the company with nearly $69.8 billion in free cash flow over the last 12 months. Free cash flow jumped by an impressive 40% year over year.
Rewarding investors with capital distributions
The company is actively putting its capital to work by rewarding investors with growing capital distributions via both dividends and buybacks. Apple allocated $11.6 billion to dividends and $35.3 billion to share repurchases over the last year, for a total of $46.9 billion in capital distributions. Management has already completed $143 billion from Apple's $200 billion capital distribution program.
This represents a lot of money, even for a company as big as Apple, with a gigantic market capitalization around $670 billion. Including dividends and buybacks, investors are being rewarded with capital distributions for approximately 7% of the company's market value, quite an outstanding return coming from such a solid and reliable business.
Even if sales growth slows down in the coming quarters, Apple still has a lot of room to continue increasing dividends and buybacks in the future. Capital distributions absorbed only 67% of free cash flow over the last year. Besides, Apple is sitting on $205 billion in cash and marketable securities on its balance sheet.
Why this matters to investors
In his excellent book What Works on Wall Street, author James O'Shaughnessy analyzes the performance of different investment strategies over the long term, and he reaches the conclusion that companies with big shareholder yield, meaning dividends plus buybacks as a percentage of market capitalization, tend to materially outperform the market.
According to O'Shaughnessy's calculations, companies with high shareholder yield returned 13.2% from 1926 to 2009, while a broader measure of the stock market returned 10.5%. To put the numbers in perspective, this means that $10,000 invested in a broad basket of stocks would have turned into $38,542,780 over the period under analysis, while the same amount of money invested in high shareholder yield stocks would have turned into a much larger $298,363,138 by the end of the period.
Companies making big capital distributions tend to deliver market-beating returns over the long term. Apple is distributing tons of money to shareholders, and everything indicates that the company is strong enough to sustain and increase those payments in the future. This clearly bodes well for investors in Apple stock in the years ahead.
Andrés Cardenal owns shares of Apple. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.