Sunday, July 17, 2016

Apple: Three Items To Watch

I’ve been tracking the performance of Apple for nearly twenty five years and chronicling the twists, turns, successes and changes at the company for most of that time. Over the past several months I’ve taken time to look at the company in several different ways and today I will mention three items I consider important for long-term shareholders of the company. These items are the share repurchase program, Apple’s rising R&D expenses and the growth in the company’s Services revenue segment. 

I consider these three items important as Apple faces yet another period of change and eventual transformation. The pace of iPhone units sales growth has slowed and the company faces challenges in all three of its major device lines. Yet for long-term shareholders there’s more to Apple than this fiscal year’s performance. I will explain more in this article.

Today’s coverage of Apple in the financial and popular press frequently mentions speculation about the upcoming iPhone refresh, rumors about changes in the iPhone’s form expected in the fall of 2017 and the decline in iPhone unit sales compared to last fiscal year’s nearly 37% unit sales growth rate. But there’s much more to Apple than the iPhone franchise and while unit sales will always be in flux, the three items I’m mentioning today demonstrate a trend that may lead to higher shareholder value over the next several years. 

Apple’s Share Repurchase Program
The graph below illustrates the impact of Apple’s massive share repurchase program on the fully diluted share count as reported each quarter. Since reaching a peak of 6.637 billion shares on a split-adjust basis in the September quarter of FY2012, management has reduced the fully diluted share count as of the end of the March quarter to about 5.541 billion shares or by about 16.50% in under four years. 

As of the end of the March quarter Apple had exhausted $117 billion of the $175 billion in authorized share repurchases. The remaining $58 billion in authorized repurchases are scheduled to be completed by the end of March 2018. Notwithstanding the debt acquired to fund the massive share repurchase program, Apple’s cash position remains the envy of much of corporate America. Net of debt the company’s cash and equivalents position stood at nearly $164 billion at the end of the March quarter. 

For long-term shareholders the reduction in the fully diluted share count boosts the company's reported earnings per share due to the fact there are fewer shares by which reported net income is divided to determine the eps results. It’s my view net income growth is the primary driver of Apple’s share price appreciation. In periods of rising net income, the share repurchase program will amplify the impact of rising net income on the earnings per share results. In addition to a beneficial impact on earnings per share results, the fewer number of shares may mean a larger dividend per share in the years ahead.