Mon, 19 Mar 2012
Even after the tech giant's new dividend payment, Apple will still have plenty of dry powder to pursue all of its growth initiatives, says Morningstar's Mike Holt.
Jeremy Glaser: For Morningstar, I am Jeremy Glaser. Apple has finally announced what the firm is going to do with its giant cash hoard. I am here today with associate director Mike Holt to see if it changes his investment thesis on Apple, and if investors should be cheering the move.
Mike, thanks for joining me today.
Michael Holt: Thanks for having me.
Glaser: Let's start off just with this announcement, in particular. What did Apple announce? What is it going to do with some of this cash? How is it going to return it to shareholders?
Holt: This is the first time we have gotten a message from Apple on what it is going to do with this cash hoard. The firm is going to do a dividend at just under a 2% yield. Apple will also repurchase shares, with a primary objective of offsetting dilution. Then the firm is going to do some offsets to the unvested restricted stock units to make them whole for the dividend as they vest.
Glaser: This is certainly a pretty big change in strategy. For a while, Apple was very keen on having this big cash hoard the firm said it needed for supplier agreements or it just wanted to have some dry powder. What do you think forced management's hand to really start returning some of this cash? Did they just have too much?
Holt: It's quite simple; Apple just has too much cash now. It's clearly excess cash when you get to $100 billion. Of course Apple wanted to maintain its flexibility. It wanted to be able to do acquisitions when it makes sense. The firm doesn't want to have to choose between product launches it might want to do; Apple wants to pursue all the initiatives that it wants to pursue. Maybe at $20 billion, the firm needed that cash to feel like it had that flexibility. But at $100 billion, Apple doesn't need to trade-off any flexibility to return some of this to shareholders.
Glaser: So you don't think that this move is going to make it difficult for Apple to continue on its growth path?
Holt: No. The firm has plenty of cash in reserve to pursue all the initiatives it wants to pursue.
Glaser: So does this change your fair value estimate? Does it change the way that you think about investing in Apple shares?
Holt: No, not really. We are already accounting for this cash and investments in our fair value estimate, so it's not something that will change our valuation. I would say, however, there are some small positives that come out of this. This lowers the risk that Apple is going to do something stupid with the money. So if the excess cash were burning a hole in the firm's pocket, you never know what might happen. We didn't expect Apple to do something foolish or something that wouldn't be shareholder-friendly, but this definitely lowers that risk even further.
Glaser: What is going to drive investment in Apple? If it's not going to be the dividend and if it's not going to be the fact that Apple is changing its cash management a little bit, what are the big drivers in your valuation model?
Holt: The biggest drivers are just Apple's product pipeline. We look at whether the firm will keep on coming out with innovative devices; we definitely think it is going to do that. I think the biggest wild cards in the valuation had to do with, as Apple penetrates into the emerging markets, and as the firm has devices that are selling at lower price points, what does that do to the revenue per device, and what does that do to the margin profile of the overall company? We still expect Apple will be incredibly successful and continue to sell a lot of units. But as the firm penetrates further into India, China, Brazil, what do those price points look like?
Glaser: So it sounds like the dividend is not going to be a huge driver of what's going to get people to the company, but certainly it has some small net positives?
Glaser: Well, Mike, thanks so much for your thoughts today. I appreciate it.
Holt: Thanks for having me.
Glaser: For Morningstar, I am Jeremy Glaser.