Apple’s Capital Management – $90bn buyback announced + dividend increased

Investment Thesis:

High barriers to entry. Strong strategic position in the rapidly growing global smartphone market especially with high end consumers. Loyal consumer base resulting in lower competitive pressure, and higher pricing power.
Recent share price de-rating is likely factoring in near-term headwinds.
Large cash balance and strong free cash flow supporting share buyback and dividend payout.
Leading positions in iPhone (~55.0% of revenue); iPads (~7.0%); and Macs (~9.0%)
Other products (such as wearables and home products) – APPL seized the leading position off the back of a surge in smartwatch sales in a market expected to grow single digit till 2022 and double digit thereafter.
Strong senior executive team reducing (not totally eliminating) key man risk.

Key Risks:

Geo-political tensions. The trade war between the USA and China poses a threat to the company’s future profits. AAPL currently obtains components from single or limited sources (mostly China), the Company is subject to significant supply and pricing risks. Also, Greater China is a major market contributing to approximately 20% (1H22) of total revenue and any retaliatory efforts from Beijing could impact those sales.
Whilst there are only a handful of competitors, the competition is Intense from Android manufacturers. The most notable competitors in the smartphone market (which contributes 50% of Apple’s revenues) are the Korean giant Samsung and two rapidly growing Chinese smartphone players in Huawei and Xiaomi. On raw performance specs (i.e., camera, maps, screen size, charge time, etc.), one may assert that AAPL devices are technically inferior to a handful of Android devices.
Movements in U.S. dollar (USD). The greenback’s strong gain recently (due to currency’s safe-haven appeal in the light of the ongoing coronavirus pandemic and Russia-Ukraine war), meaning foreign currency earnings of AAPL can be worth less when translated back to USD. The weakness in foreign currencies relative to USD will have an adverse impact on net sales.
Adverse regulatory policies.

Key Highlights:

Strong shareholder returns with the Company returning ~$27bn ($3.6bn in dividends + $22.9bn in buybacks) during 2Q22. The Board authorized an additional $90bn for share repurchases and increased 2Q22 dividend by +5% to $0.23 a share with plans for annual increases in the dividend going forward.
Ample liquidity with $193bn in cash and marketable securities and $120bn in debt, resulting in a net cash position of $73bn.
Revenue increased +9% YoY to $97.3bn, setting new 2Q records in the Americas, Europe and greater China, with Product revenue up +7% YoY to $77.5bn and installed base of active devices reaching an all-time high for all major product categories as well as geographic segments, and Services setting an all-time revenue record of $19.8bn, up +17% YoY with 2Q records in every geographic segment and services category as the Company continued to improve the quality and increased its offerings. AAPL plans to introduce tap-to-pay on iPhone (way for businesses to accept contactless payments) across the U.S. by end of FY22.
Gross margin increased +120bps YoY to 43.7%, with favourable mix partially offset by unfavourable FX, with Products margin up +30bps YoY to 36.4% and Services margin up +250bps YoY to 72.6%.
Net income of $25bn (up +6% YoY) and diluted EPS of $1.52 (up +9% YoY) were 2Q records.

Company Description:

Apple Inc. (AAPL) designs and manufactures media devices and personal computers (Macs), and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. The company leads the world in innovation with iPhone, iPad, Mac, apple watch and Apple tv.

(Source: Banyantree)

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