Apple Has Dazzling Sideshow, But Main Event Is Boring

Apr 26 2014, 6:34pm CDT | by

Imagine. Steve Jobs comes onstage, firing up his iPad to project beautiful tables and charts of money. From the stage sofa, he announces Apple’s stock split (“Now the little investor can buy 70 shares instead of only ten”). He then tells about the big dividend money being distributed to shareholders (“We trust you to put it to better use than we can”). Next, he explains the large increase in share buybacks (“We have it in our control to grow our earnings-per-share through share attrition.”) Then, with pride, he announces that this largesse can be done without recalling taxable overseas cash deposits by simply borrowing the money (“Apple Aims for Another Blockbuster Bond Deal”).

A year after it pulled off a then-corporate record $17 billion bond sale, Apple Inc.’s plans to raise a similar sum this year….

Apple expects to sell debt in the U.S. and abroad and use any proceeds to fund the company’s share repurchases and dividends, Luca Maestri, vice president and corporate controller, said on Apple’s earnings call on Wednesday….

Apple said late Wednesday that it added $30 billion to its stock-buyback plan and aims to return more than $130 billion to shareholders by the end of 2015. It also raised its dividend about 8%. Chief Executive Tim Cook said the company expanded the buyback program because management doesn’t believe the full value of the company is reflected in the stock price.

The audience response?

It depends on the attendee’s point of view:

  • Cheers by the Wall Street activist types, as they ready their “Sell” tickets now that AAPL has popped 8+%
  • Polite applause from the long-term investors, still hoping that financial cleverness somehow benefits Apple’s fundamental outlook
  • All quiet on the Apple-nerd front, as they tweet “WTB?” (“Where’s the beef?”) and reconsider their career choices

So, what’s wrong with the actions Cook is taking?

It’s a sideshow that has no meaningful effect on Apple’s future in the big tent of technological innovation. Cook is fiddling while Apple’s competitive prospects are stagnating or worse.

Look at this situation this way: None of the announced actions will affect Apple’s core business one iota. Even a rise in the stock price won’t help because Apple doesn’t use the stock to make any significant acquisitions. Therefore, that price bump is not to be trusted. Here are the problems:

Companies cannot buy long-term investors with financial gimmicks

Yes, there are investors and observers who view dividend increases, share buybacks and stock splits as positive news. However, analysts, portfolio managers and savvy investors are not taken in when those tactics do not reflect underlying company strength and growth. Financial actions taken solely to boost the stock price are viewed as management schemes, not wise strategy. Moreover…

Stock splits are non-events and do not lead to higher prices

Yes, we read about splits being the management-board’s insider-type announcement of good times ahead. However, the basis for that belief is flawed. The split is only confirmation that the preceding stock rise was viewed by the management-board as reason to re-price the stock.

In fact, it can be the absence of a stock split that is important, but only for a company that has stock split policy. Caterpillar’s decision not to split its stock in 2011 is a good example (see “Caterpillar: Important News Coming Soon”). Here’s the graph from that article:

But what about those studies proving that splits invariably lead to higher price gains?

Don’t believe them. The most rigorous studies, done years ago, disproved that notion (and many other investors’ homespun beliefs – like “Sell in May and go away,” etc. etc.). Done properly, here is the picture of excess performance before and after stock split:

Worse are the articles describing today’s studies. Often, authors include an “I know someone who buys on the event and makes a big return” – the same kind of spurious proof found in Internet chain letters.

The bottom line/>/>

Probably the best saying for long-term Apple investors to recall now is, “It’s not your father’s Oldsmobile.” Apple’s shiny new, Wall Street approved, exterior hides the underpowered innovation engine inside. Jobs’ Apple was powered by an “innovation first, last and foremost” strategy.  Cook’s Apple has converted to an alternative fuel:  financial cleverness. (Proof? When Icahn arrived on the scene, Cook said he had a nice meeting with him. Jobs response undoubtedly would have been markedly different.)

Of course, this situation doesn’t mean AAPL will go nowhere. In the stock market, just about anything can happen. But it does prove that long-time Apple shareholders are invested in a different company today than the one they bought originally. The question is whether to move on to other, more promising, growth companies. Not doing so means the investor’s rationale (and investment approach) has changed. With professional investors, such a change is cause for criticism, even dismissal. So, investors need to carefully consider what it means to hang on.

But, what about Apple’s valuation? Isn’t it cheap?

Yes, AAPL is cheap – still. But that’s a weak sign in this market. Even with the recent biotech and tech declines, valuations of companies with good potential growth remain higher – as they should. AAPL’s lower valuation (using forward P/E = 54th of 72 tech companies in the S&P 500) is a measure of lower growth potential, not an indicator of a price explosion about to happen.


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