In January I predicted that we would see Apple deliver dividends in Q3 2012. I got it wrong, they are going for Q2 (that July 1 which is Apple’s fiscal Q4 2012) and this table is going to look very different for the foreseeable future. So what does that mean for Apple’s future strategy?

Apple last paid a dividend back in 1995 and a change to a 17 year old policy is bound to get a lot of attention. It is certainly a significant move but, I don’t believe it is actually of much strategic importance. At the same time Apple announced that they would be engaging in a multi-annual share buy back programme. This too is significant but, not necessarily strategic. So how can a major share buy back and a dividend policy of the scale ($45 Billion) announced by Apple not have strategic implications?

Let’s look at some of the numbers. The dividend announced is $2.65 quarterly ($10.60 annualised) per share. With Apple stock hitting the €600 mark that represents a dividend yield of 1.76%. At over 930 million outstanding shares that adds up to an annual $10 Billion dividend payment making it one of the largest absolute dividend payouts on the US stockmarket.

The share buy back scheme is committed collecting $10 Billion over the next three years. There is not enough detail provided to work out the exact number here, but in the conference call Oppenheimer, Apple’s CFO, mentioned an expected $4 Billion cash draw in the first 12 months which is the net impact of share buy back and the cash cost of dividend payments to net settle stock options being vested. Interestingly, Apple’s CEO, Tim Cooke, has waived his right to dividend payments on his unvested stock options. As you would expect it is difficult enough to unpick these numbers, but given that the first year cash draw is estimated to be $4 Billion ($12 Billion if it remained stable over the three years) and the estimates are for a total $45 Billion cash draw, which leaves $15 Billion after dividends, we can presume that some of the $3 Billion buffer is for expected stock price rises.

 

Apple Free Cash Flow TTM ChartSo overall Apple will be down by $45 Billion dollars in cash over the next three years, right! Well sort of. Relatively this is correct, but in absolute terms that doesn’t explain the whole story. In the past year Apple generated $41 Billion in free cash and if it continues at that rate it will actually swell its bank balance $27 Billion dollars in the coming year even after the share buy back and dividend payments. To thread water and maintain its cash balance it needs to keep generating free cash at the rate it did in mid 2010. All this is of course assuming there are no monster acquisitions.

So if, as it seems likely, Apple will have north of $100 Billion cash this time next year, what could they buy. Well Google might be a little out of their reach for an outright purchase with a market capitalisation of $210 Billion, but Philips or Sony could be a snip at $20 Billion a piece!

So what does all this mean for Apple’s strategy. In short, very little. The decision to pay such huge dividends is a function of a company that can grow revenues with excellent margins that translate rapidly into cash. This is a company that grows organically and while it needs cash for that growth and some flexibility to make acquisitions it has more than enough cash to cope.

The bigger Apple question is what does the pipeline look like. From Tim Cooke you get the standard answer – trust me it’s great. It is however pretty clear that the iPad and iPhone markets are moving (slowly) towards commoditisation. Unit prices are not growing and over the next 24 months Apple will be forced to bring out infill products to cover the range as they already have with the iPod in the form of Shuffle, Nano, Classic and Touch. This helps maintain revenue but hurts margin –  and  Apple’s share price demands margin. For the moment we will have to wait and see what emerges. Maintaining significant growth from the current baseline needs something like a new $1 Billion business every week! That will mean they need to own and probably create some new market spaces. Will it be new markets, new products, new sectors, new services, or integrated offerings. Yes. It will take all of the above to feed the Apple monster. This is going to be fun to watch.

 


 

by Robert Galavan, PhD

Professor of Strategic Management at the National University of Ireland Maynooth

 

This post was originally published here http://facultyblog.nuimbusiness.ie/2012/03/23/what-does-the-apple-dividend-say-about-its-strategy

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