Sometimes those buybacks are just a waste of money, too. Consider that since 2006, Microsoft has spent almost $80 billion on share buybacks, including a current $40 billion buyback program that runs through 2013. The stock has mostly flatlined when you back out the strong year-to-date rally of 25% in about three months.
Apple’s corporate line makes sense, to a point. The buyback of shares will keep the number of outstanding AAPL shares constant as new stock is issued to insiders. But come on, do we really expect Apple to dish out $10 billion in stock awards? That’s a huge chunk, so Apple will be able to cover that balance and much more.
Don’t Panic: Apple Will See Few Short-Term Changes
This is not to say Apple is doomed to die a slow death. In the conference call Monday, Apple focused a lot on investments in R&D and acquisitions and retail. This year alone, Apple is opening 40 new locations.
“We don’t see ceilings for our opportunities,” CEO Tim Cook told reporters. “Innovation is the most important objective at Apple, and we will not lose sight of that. These decisions will not close any doors for us.”
Cook also said Apple will have a war chest for future acquisitions and developments. That’s believable, since $100 billion in hard cash on the books and the wildly profitable iPhone and iPad will continue to generate no shortage of future profits. So don’t think that by next year Apple will be a slow-and-steady stock that sees only incremental growth.
But let’s be honest: The company has just committed one-fifth of its stockpile — $20 billion — to dividends and repurchases. That’s no mean sum even if Apple has plenty of cash leftover and has plenty of profits to support these moves for many years to come.
The dividend and buybacks deliver a form of value to shareholders, but clearly Apple has decided it is going to look beyond just growth. That’s prudent, considering the size of its current operations.
To be clear, Apple surely will keep growing. Its recent iPad relaunch will increase its stranglehold on the tablet market. The iPhone is a $50 billion business annually, so this gadget alone provides the cash flow for the ambitious dividend and stock repurchase plans. This isn’t the end of the road by any stretch of the imagination.
But over the next several years, you can expect some slow but serious changes in Apple’s approach. The shareholder base will change and dividend investors will get more involved. The balance sheet will evolve as these huge commitments take up a bigger part of the company’s operations.
And now that Apple finally has declared a dividend, it will have to deal with demands to increase that dividend. After all, its payout is only 25% of profits — and historically, the S&P 500 companies offer around a 50% dividend payout ratio.
In short, these recent dividend and buyback moves will slowly begin to change how Apple stock is perceived by investors and how corporate executives operate this publicly traded company.
So don’t be surprised if five or 10 years from now, Apple has a lot more in common with Microsoft and other mature tech stocks than it does with innovative, high-growth startups.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace?.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff did not hold a position in any of the aforementioned securities.