$145 billion in cash buys Apple a lot of options
The debate surrounding Apple's earnings in the March quarter had been as divisive as it's been in years: What would happen to the company that, only one year ago, was on track to become the world's first trillion-dollar company? Would it appease angry investors with increased dividends and buybacks? Or would it insist on investing in future growth as it as always done?
Today, Apple delivered its answer: It will do both. That's one of the perks of having $145 billion in cash.
The news may not quiet the debate over whether Apple is in a period of decline or simply catching its breath for a new wave of growth. But it should silence for some time gadfly investors who wanted the company to return more cash directly to them. Apple is returning an extra $55 billion to shareholders in dividends and buybacks. All told, by the end of 2015 the company will have returned $100 billion to investors.
Apple said it will increase its dividend yield to 3 percent (higher than yields on 30-year US Treasuries and comparable to Microsoft's yield of 3.1 percent). Because so much of its cash is tied up in overseas accounts, Apple said will borrow money to avoid paying U.S. taxes on repatriated earnings. No sooner did Apple speak of the debt than ratings agencies stepped forward with debt ratings: AA+ S&P and AA1 from Moody's. (Microsoft, by comparison, has higher ratings of AAA from both agencies).
To some, the increased payouts may be a sign of capitulation to investors, who have seen the stock fall from $705 a share last September to $385 a share last week – a loss of nearly $300 billion in market value in seven months. It may even be read as by bears a sign that Apple is throwing in the towel on innovation since, as the meme goes, Apple's best days are behind it.
I'm not so sure that's the case. For years, Steve Jobs refused to pay a dividend, saying the money is better spent reinvesting in future products. But the future products Apple invested in left it with a massive cash balance that can be directed to present shareholders and future growth.
In recent years, publicly traded tech comanies have fallen into two camps. The early tech giants like Microsoft and Intel who have seen slower growth and compensated with dividends and buybacks for investors. That practice added to the image of dividends as the corporate equivalent of liver spots – emblems of middle age. Other companies, like Amazon and Google, see their stocks rise without dividends because they've persuaded investors they can productively invest in future profits.
Apple likes to do things its own way, however, so it's planted itself in both camps – a company that pays handsome dividends but that is also hell bent on laying the foundation of years of strong growth with new products. That was the message Tim Cook kept returning to during the conference call with analysts to discuss today's earnings.
Apple has created or redefined several product categories over the past decade – the mp3 player, the smartphone, the tablet. In time, shifting consumer tastes and new competition has eroded its early market lead. Consumers in emerging markets like bigger smartphone screens and smaller tablets. And everyone likes lower-prices, so the biggest growth in both smartphones and tablets is at the low-end of the market.
Cook explained that Apple is responding to changes in the markets it helped to established. The iPad Mini is appealing to many first-time tablet buyers overseas, he said, which is helping Apple's market share but weighing on gross margins. He suggested a larger-screen iPhone may be coming by the end of the year, but only when its graphics are up to the standards of current iPhones.
More importantly, he mentioned “the potential of exciting new product categories.” That caught the attention of Pipar Jaffray analyst Gene Munster, who noticed that Cook didn't say new products – which might mean, say, a bigger iPhone. He said, new product categories, which in Apple's language means something cut from whole cloth. Like the TV product Apple has been working for years. Or a wearable computer like Google Glass (only one that wouldn't spawn pejoratives like “glasshole.”) Or a payments product drawing on iTunes accounts that could disrupt the credit-card industry.
Of course, no one outside Apple can do anything but speculate on what these new product categories might be, or what kind of success they might see when launched. That's because Apple's approach is to be stealthy about new product categories, so that when they finally launch the company has a head start over competitors.
The flip side of that stealth, however, is that it casts a pall of uncertainty over Apple's longer-term future. Google talks openly about products in early development - such as Fiber, Glass and self-driving cars - and because the company is so good at selling ads on what it develops, investors have come to trust its long-term vision. Apple is so secretive about its next act it creates a void of expectations. And staring into that void, investors see despair.
It doesn't help either that, in contrast to Steve Jobs' speaking style, Cook comes across as comparatively diffident. In contrast to Jobs' memorable rants during conference calls, Cook relies on the anodyne jargon that most CEOs use. At times, he seems to be reading from statements even when he's answering spontaneous questions. Asked by Munster about the timing of new product categories, Cook cut himself off in mid-sentence.
Under Cook, Apple's tone may have changed, but its DNA hasn't. News coverage of the stock suggests the company that once could do no wrong can now do nothing right – adding to the impression that Apple's best days are behind it. Instead, the company likely has a few rough quarters ahead of it before it launches products that could create new markets for itself. Until then, investors can solace themselves with the $30 billion Apple will be shelling out to them each year.