As Profit Slips, Apple Looks to Reward Shareholders

On Tuesday, the technology giant announced that it planned to more than double its program to return cash to shareholders through stock buybacks and a higher dividend, spending $100 billion on the effort through the end of 2015. Its share repurchases alone will increase to $60 billion from the $10 billion it committed previously, the largest such plan in history, the company said.

The move to renew investors’ love affair with Apple’s stock came as the company announced its first profit decline in a decade. Apple said its net income fell 18 percent in its fiscal second quarter, as one of the most successful technology franchises in recent years, the iPhone, showed signs of slowing and other, less profitable products began to make up more of its sales.

The rarity of Apple’s profit decline, which was expected, underscores how one of the most remarkable winning streaks in business has come to an end, at least for now. Investors have battered the company’s stock for months, sending its shares down from their peak of more than $700 last year as warning signs began to emerge about its growth prospects.

In regular trading on Tuesday, Apple shares rose nearly 2 percent to close at $406.13, but they fell slightly in after-hours trading as investors digested the quarterly earnings news and Apple’s plan to return cash to shareholders. One thing that spooked investors is that Apple told them to expect little to no sales growth in this quarter.

“People are concerned they can’t return to growth,” said Walter Piecyk, an analyst at BTIG Research, an institutional brokerage firm.

One of the biggest questions facing Apple is whether it can innovate its way out of its funk by delivering a breakthrough new product, perhaps in a category like television, that rekindles growth and investors’ passion.

Timothy D. Cook, the company’s chief executive, said in a conference call with analysts that the decline in the stock price has been “very frustrating to all of us,” but that Apple remains strong. “Our teams are hard at work on some amazing new hardware, software and services that we can’t wait to introduce this fall and throughout 2014,” Mr. Cook said.

Mr. Cook even dropped a hint about “exciting new product categories” that Apple could enter, suggesting the company is preparing a move into a new market.

For its fiscal second quarter, which ended March 30, the company said that its net income dropped 18 percent to $9.55 billion, or $10.09 a share, from $11.62 billion, or $12.30 a share, during the same period a year earlier.

Revenue rose 11 percent to $43.6 billion from $39.19 billion a year before.

Wall Street analysts expected the company to report earnings of $10.07 a share and revenue of $42.59 billion, according to the average of estimates compiled by Thomson Reuters.

Months ago, Apple sought to brace investors by warning that profit could decline about 20 percent in the quarter. At that time, Apple forecast revenue of $41 billion to $43 billion.

Sales of iPhones, the company’s biggest business, grew only 3 percent to $22.96 billion in the second quarter.

The company has warned that new products like the iPad Mini have lower profit margins than older items like its full-size iPad sibling. It is also selling more of its older model smartphones, like the iPhone 4, which have lower margins. That has stirred up worries that Apple’s efforts to cater to more budget-conscious consumers with low-price products could steadily erode its considerable profits.

Apple is widely thought to be preparing a new low-cost version of the iPhone to compete more aggressively with smartphones based on Google’s Android operating system. A cheaper device could hold special appeal in huge markets like India and China where average incomes are far lower than in the West.

Pushing into inexpensive phones could hurt Apple’s admired profit margins, though. Last year, the company garnered almost 70 percent of the profit in the mobile handset business, according to estimates by Canaccord Genuity.

Apple’s gross profit margins, one of the most closely watched measures of how profitable it is, are already declining, falling to 37.5 percent in the second quarter from 47.4 percent a year ago. This is the fourth consecutive quarter of declining gross margins at Apple, the longest stretch of such declines since 1993, according to Bill Moore, director of corporate development for Bloodhound Investment Research, a provider of online investment management tools.

Apple warned that its gross margins would probably continue to fall in the fiscal third quarter, dropping between 36 percent and 37 percent.

“Investors would love some sense of when gross margins will stabilize, and unfortunately Apple didn’t give us that,” said Rob Cihra, an analyst at Evercore Partners.

As Apple’s holdings of cash and cash equivalents have swelled — the figure is now over $140 billion — investors have clamored loudly for the company to step up its efforts to buy back shares or issue a bigger dividend.

The company said on Tuesday that its board had approved a 15 percent increase in its quarterly dividend. It declared a dividend of $3.05 a common share, which will be paid to shareholders on May 16.

Apple said it planned to borrow cash as part of its plan to return cash to shareholders. Even though Apple has far more capital than it needs in its coffers, much of it is held overseas and would be subject to taxes if the company were to bring it back to the United States. Apple can also help increase its earnings per share by lowering its outstanding share count through stock purchases.

“We believe so strongly that repurchasing our shares represents an attractive use of our capital that we have dedicated the vast majority of the increase in our capital return program to share repurchases,” Mr. Cook said in a statement.

Article source: http://www.nytimes.com/2013/04/24/technology/as-profit-slips-apple-increases-efforts-to-reward-shareholders.html?partner=rss&emc=rss