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AAPL in IBM's footsteps?

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denial_1 January 28, 2014 (Chinavestor) Investors were dismayed by Apple Inc's (NASDAQ:AAPL) latest numbers. The stock fell -$44.0 or 7.99% on Tuesday to close just above $500 a share, a far cry from $700 it hit late September a year ago. Lack of growth is primarily responsible for the decline. Apple Inc. (NASDAQ:AAPL) reported record quarterly sales of $57.6 billion and quarterly net profit of $13.1 billion, or $14.50 per diluted share. Yet investors remember that Apple Inc. (NASDAQ:AAPL) reported quarterly sales of $54.5 billion and quarterly net profit of $13.1 billion, or $13.81 per diluted share. The EPS improvement is due to a massive stock buyback program Apple has started and not to net income growth. And this is where IBM Inc. (NYSE:IBM) comes to the picture. IBM (NYSE:IBM) has been battling the same issues, e.g. remaining highly profitable but delivering zero growth. The question is: how can companies like these return values to shareholders?

For answers let's take a look what IBM has been doing. Initiated a massive stock buyback program and undertook an ambitious cash dividend payment scheme. Sounds familiar to Apple Inc. (NASDAQ:AAPL) investors, doesn't it?

There is no better way for Apple to distribute the spoils of its operations. Because lack of top and bottom line growth gets the wind out of its stock price sail. Take a look at the following quarterly top and bottom line growth chart for a visual clue.

AAPL_revern_2013q4

The chart demonstrates that 2012 Q4 was just about the same as 2013 Q4. Basically there was no growth. But it would be a huge mistake to shun Apple Inc. (NASDAQ:AAPL) altogether. The company has a very I mean VERY healthy balance sheet. We all know that it carries a huge load of cash in its books, just over $40 billion to be precise, but there is a lot more to it than that.

Apple Inc. (NASDAQ:AAPL) has virtually no debt. OK, there is a tiny $16.9 billion debt it took on in the second quarter of this year. But there is no growth on the liabilities side and zero pressure to do so.

aapl_DEBTASSET_2013q4

This is actually a better situation than it is for IBM (NASDAQ:IBM).Take a look at the following chart. It demonstrates that IBM's debt to equity ratio is about 30% versus Apple's 12%.

IBM_balsheet

We also realize that there is no pressure on Apple Inc. (NASDAQ:AAPL) from a financial point of view. Apple Inc. (NASDAQ:AAPL) generates enough cash to continue with its massive share buyback program and to continue ambitious dividend payment. Take a look at the following picture to see Apple's latest cash flow numbers.


AAPL_cashflows2013q4

Operating cash flows remain extremely robust. Apple Inc. (NASDAQ:AAPL) generated as much as $22.67 billion cash from operations in the latest quarter, a bit short of the record $23.426 billion in 2012 Q4. But even the $22.67 billion is more than enough to fund investing and financing needs.

When it comes to financing, the company has two major obligations. Cash dividend in the magnitude of $2.769 billion this quarter alone and a stock buyback amount of $4.895 billion in this quarter. According to Peter Oppenheimer, Appleā€™s CFO, the company has basically returned cumulative payments under the capital return program to over $43 billion.

So where did this money go? Or even better to ask, what does it have achieved? The stock price fell from $700 to $500 while the company "returned" $43 billion to shareholders. But in fact it also wiped out $173 billion in market cap. This gives that net shareholder value decreased by $130 billion in the last one and a half years.

The problem for Apple Inc. (NASDAQ:AAPL) is how to return cash from operations to shareholders. IBM (NYSE:IBM) has the same issue. The company accumulated more treasury stock than Total Liabilities & Shareholders' Equity. This is so absurd that Warren Buffet came in and bought a huge piece of the action. Intrinsic value, right? The same may happen to Apple Inc. (NASDAQ:AAPL) over time. Investors looking for top and bottom line growth driven stock price appreciation disappear and value investors step in. Don't be surprised that Apple will be a highly sought after investment in a few years. But for now, the stock price slide looks inevitable.



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