When does a dividend and buyback program help “pay for itself”? When it’s a program like Apple Inc.’s, apparently.
Assuming Apple will be able to buy back at least 100M shares of stock with its $50B authorization (considering that AAPL has yet to be over $500 at any point since the expanded buyback program started, I’d say it has a decent chance of doing that), it’ll save $1.22B in dividend payments per year going forward ($12.20/share/yr), assuming no decline in payouts.
So, in a sense, Apple is currently set to “finance” its massive $50B buyback through “dividend savings” in about 42 years. Maybe add a few years if you want to factor in opportunity cost, interest rates, 2013 dollars or whatever. That’s nice, we kind of already knew that, a bit more like trivia, doesn’t make that big a difference, right?
But wait, that’s just at present dividend payout rates. And Apple’s furious buyback activity from the very beginning of the expanded buyback program may partly reflect an awareness of this. If Apple increases dividends over time, it could reduce its “payback period” by several years. Let’s assume Apple raises dividend rates by 7% every year (compounded annual) until 2019 (a total of six dividend increases), stopping at $18.30/share/year. (Not too far-fetched, considering that Apple hiked its dividend 15% in a single year; many blue-chip companies have raised their per-share dividend by 50% or more over a similar number of years; and that there exist several companies, including several brand names, that have increased dividends very year for decades.) ¹
At 100M shares retired, $18.30/share/year amounts to $1.83B in annual dividend savings. So even if Apple doesn’t raise the dividend any further, Apple now saves that $50B within about 30 years before any adjustments. Just imagine the accelerated timeframe if Apple has a higher annual dividend payout than that within the next decade or two. Apple can also accelerate the “buyback payback” timeframe even it opts for a more gradual but continuous annual dividend hike. At a 3% increase once per year (compounded annually), Apple realizes over $50B in dividend payout “savings” in just under 30 years. Bump that up to 4% compounded annually, and Apple reaches $50B saved in roughly 25 years.
All this from just this one buyback program. Think of what Apple could “save” with additional buybacks!
As a bonus, the higher Apple’s dividend payouts become, the more effective the “dividend savings” from retired shares are at “financing” the interest on its debt. Even assuming no increase in per-share dividend, Apple is already able to handle interest payments on many more billions in bonds than the $17B or so currently issued. Depending on how you think about it, the dividend “savings” are also more than enough to “finance” a good portion of the bonds themselves! ²
Is all of this simply an “unintended benefit”? Or is it a very, very shrewd exercise of leverage – maybe even a master class in how dividend and buyback programs, at least in the right conditions, can work hand-in-glove? Considering the credentials and presumed savvy of the finance team led by Peter Oppenheimer and Luca Maestri…I’m thinking the latter.
¹ For examples of dividend stocks that have increased their per-share dividend by over 50% in around 6-7 years, check out the dividend histories of IBM, Wal-Mart, and Disney. For examples of “perennial” annual dividend increases, see Proctor & Gamble, Coca-Cola, and Johnson & Johnson. Source: http://www.nasdaq.com (Dividend History pages) and dividend.com (list of perennial increasing-dividend stocks)
² Now, I am making a considerable leap of faith here – that Apple will still exist as a public company in the decades to come, and that its financial condition going forward will allow it to continue paying dividends. Good thing Apple has a bit of a cushion – $146B in total cash against $17B in bond obligations as of the end of June 2013, with many debt strategies likely still available given the roughly $40B Apple has in cash domestically. And last I checked Apple is still in good financial health and generating billions in cash every single quarter, so there’s that, too.