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What to Expect at Apple's Shareholder Meeting

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Apple holds its shareholders meeting on Wednesday, February 27.  After not saying much of substance at the Goldman Sachs conference regarding its dividend and share buyback plans (which would not have been a forum to announce any major changes) management has an opportunity to provide an update on its capital allocation plan in a more public venue.  If it does look for a press release the morning of the shareholders meeting before the market opens.  The two major items are the Dividend and Stock Buyback.

Dividend

Currently Apple is paying a $10.60 per year dividend with a yield of 2.3%.  Compared to S&P 500 (2.1%) and other large cap tech companies (low of 0.7% at Oracle to a high of 4.3% at Intel) it is in the same ballpark.

Stock

Dividend

Yield

Apple

$460

$10.60

2.3%

S&P 500

2.1%

Cisco

$21

$0.56

2.7%

HP

$17

$0.53

3.2%

IBM

$201

$3.40

1.7%

Intel

$21

$0.90

4.3%

Microsoft

$28

$0.92

3.3%

Oracle

$35

$0.24

0.7%

Prices as of Friday, February 15, 2013

I would not expect a large one-time dividend.  If the company had wanted to do that it would have done it in 2012 when tax rates were lower.  I do expect the company to increase it but at a measured pace, say 10% per year, as a dividend is a more serious commitment than a share buyback.  While it may announce an increase at the shareholders meeting since it declared the $10.60 per year dividend on March 19 last year it may not occur until July when it should be announcing the record date for the August 2013 payment.

Buyback

Apple earned just over 1% on its cash and investments in fiscal 2012.  While I don’t believe the company is going to fundamentally change it investment objectives to increase the rate of return this rate should move up when overall interest rates increase (but this may not occur for at least a year if not two).  Therefore with the shares trading at about a 10x PE multiple the company can essentially create a 10% return on the money when it buys back shares while only losing 1% in interest.

To increases its EPS by 10% by decreasing its share count Apple would have to buyback 95 million shares at a cost of about $50 billion assuming an average cost of $525 per share due to the market reaction.  It would be a stretch to do this in a year or two without taking on debt since the company has only about $39 billion in US based cash and investments.  And assuming that it would not bring back overseas cash and pay up to 35% in taxes on it.

It appears that Apple may be executing its share buyback faster than expected.  It announced in March 2012 that it would be buying back $10 billion in stock over three years to negate options that it would be issuing.  In the December 2012 quarter the company spent $1.95 billion on its shares so if it were to maintain that run-rate it would use up the $10 billion in just over five quarters.  It would not surprise me if Apple was spending more than that in the March quarter given the weakness in the shares.  While we will find out how much the company spent this quarter when it announces it results in April, we may get an update at the shareholders meeting.

Between having more money than is needed to run the company that the company has acknowledged, the decline in the share price and the increased rumblings from investors it would not surprise me to see an increase to the current buyback plan announced.

Remember it has not been that long that Apple has had such a huge stockpile of cash and investments.  The company’s cash position ten years ago was about $4.3 billion and was only five years after taking an investment from Microsoft to stay alive.

Five years ago the company had $15.4 billion.  A large amount but was in the midst of creating a number of new products so it was not at all unreasonable to not be paying a dividend or buying back shares.

Also, I don’t expect Apple to embark on what I would consider financial engineering and execute what David Einhorn is proposing with a 4% preferred stock.  I don’t believe many companies have been successful increasing their total market value by issuing another class of shares and Apple can essentially accomplish the same objective with regular dividends and share buybacks.

Conclusion

I am not expecting an increase to the dividend at the shareholders meeting but would not be surprised to get an update on how much the company has spent so far this quarter on share buybacks and see an increase to its current buyback plan.

With the calculation that it would take about $5 billion to decrease the share count by 1% I believe that the company will need to announce at least an additional $25 billion share buyback program or a decrease of 5% in the share count to have the market react positively.

Disclosure: My family and I own Apple shares