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Though not as sexy as iPhone sales, Apple Inc.’s capital-allocation update could be the biggest bit of news to come out of Apple’s earnings report.
The smartphone maker typically issues updates on the shareholder-return front in conjunction with its March-quarter earnings release, and Chief Financial Officer Luca Maestri told investors after Apple’s last earnings report that given the recent tax bill, there’s going to be some news when Apple reports fiscal second-quarter results after the bell today.
What makes Apple’s capital-allocation announcement especially notable this time around is the company’s disclosure last quarter that it plans to become net-cash neutral “over time.” Apple has some $160 billion to spend if it hopes to achieve this goal, and given its demonstrated preference for returning most of its cash to shareholders, this year’s update should be significant.
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Apple boosted its capital-return program by $50 billion a year ago, bringing the cumulative total to about $300 billion through March 2019. Though it’s well-established that the program will increase this year, analysts are split on the specifics.
One of the most optimistic on the dividend front is Wells Fargo analyst Aaron Rakers, who has a market perform rating on the stock and a $195 target.
“Apple has increased its cumulative capital return program by $30 billion to $50 billion in each of the past five years,” he wrote. “We now consider whether Apple could outline a >30% dividend increase (versus +11% average over the past four years, though maintaining a $11 billion to $12 billion [a year] payout) and an incremental $100 billion-plus share [repurchase] program.”
Bernstein analyst Toni Sacconaghi sees the company raising its total shareholder-return allocation by $180 billion over the next 2½ years, through incremental buybacks of $50 billion annually as well as a 15% to 20% boost to the dividend. Such efforts could lift fiscal 2018 earnings per share by 12 cents, he argued, and fiscal 2019 earnings per share by 79 cents. Sacconaghi has a market perform rating and a $170 price target on the stock.
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One thing analysts don’t expect to see is a special dividend.
“CEO Tim Cook has explicitly stated that he is ‘not a fan’ of special dividends,” wrote RBC Capital Markets analyst Amit Daryanani, who also pointed out that Apple has never been in the business of pursuing large acquisitions. He rates the stock at outperform with a $203 target price.
The prospect of increased capital returns has likely given shares a lift since the December-quarter earnings release, so there’s debate as to how much the actual news can jolt shares further, especially amid perceived weakness in iPhone demand.
Daryanani is relatively upbeat, writing that Apple “has the potential to positively surprise” with both its shareholder-return program as well as increases in the iPhone’s average selling price.
Bernstein’s Sacconaghi, however, thinks we’re ultimately still living in an iPhone world.
“While Apple’s expected large capital return program could mitigate the impact to earnings from weak iPhone, we think that on net, fiscal 2018 and fiscal 2019 earnings are more likely to go down than up,” he wrote. “Moreover, we believe that the investor narrative post-earnings will likely be dominated by the question of whether the iPhone business can grow over time.”
Though Apple CFO Maestri was vague when saying that Apple wants to become net-cash neutral “over time,” investors should expect clarity on the time frame with the coming update. It’s also worth noting that while Apple tends to return most of its cash to shareholders, it will likely keep some aside for smaller deals, original content and its plans to invest in both data centers and other technological areas.
Apple shares are up 14% in the past 12 months, while the Dow Jones Industrial Average of which Apple is a component, has gained 16% and the S&P 500 index has increased 12%.