Shares of Apple (NASDAQ:AAPL) went on a tear on Friday, fueled by a solid earnings report, a huge stock buyback plan, a higher dividend, and probably some pent-up demand for the recently not-so-magnificent stock.
Apple has been the clear laggard among the so-called Magnificent Seven over the past year or so. Over the past 12 months as of May 2, it has only returned 2.7%, and year to date, it had fallen about 7% until Friday’s surge.
Apple stock gained about 7% to reach $185 per share in morning trading on Friday. Here’s a look at what drove it higher.
Decent numbers, big buyback
Apple beat earnings estimates for its fiscal second quarter, although its growth rates were still down year over year. Net sales came in at about $90.7 billion, which is about 4.3% less than the same quarter a year ago. However, the cost of sales fell about 9% to $48.5 billion, which helped Apple’s bottom line. Net income only fell 2% year over year to $23.6 billion, and earnings per share held steady at $1.53 per share.
The technology giant is still having sales trouble with its iPhone, however. Apple’s products revenue, which includes the iPhone, was off 9.4% year over year to $66.9 billion.
However, the company was buoyed by record revenue for its services division, which grew 14% to $23.9 billion. Apple services include subscriptions to Apple TV and Apple Music, among others, ads, digital content, cloud storage, and Apple Pay. The services division still pales in comparison to the product division, but its growth has been a good diversifier for Apple, particularly as phone and product sales slow.
However, the bigger news from the quarter was Apple’s massive stock-buyback announcement. The board authorized the repurchase of $110 billion in company stock. That is not only the biggest share repurchase commitment by Apple; it is also the largest in U.S. history. The company also raised its dividend 4% to 25 cents per share.
“Given our confidence in Apple’s future and the value we see in our stock, our board has authorized an additional $110 billion for share repurchases. We are also raising our quarterly dividend for the 12th year in a row,” Chief Financial Officer Luca Maestri said in the earnings report.
Share repurchases are just that. The company buys back its shares from investors, giving them an opportunity to cash in if they wish. It also reduces the number of shares outstanding, which has the effect of boosting the share price and creating more shareholder value because fewer shares for the same amount of earnings creates higher earnings per share.
Apple saw it as a good time to make this move as the value of its shares is relatively low. The stock was trading at about $173 per share, down 6% for the year, and it has a price-to-earnings ratio of 26 times, which is low for Apple. Apple is being a good value investor here, taking advantage of the lower price.
Better times ahead?
The buyback will provide some tailwinds for Apple stock leading up to what it expects to be better days ahead. CEO Tim Cook teased an “exciting product announcement” next week, which is expected to be new models for the iPad Air and iPad Pro, according to reports.
Apple also has its Worldwide Developers Conference coming up in June, where it is expected to introduce iOS 18, rumored to be one of the biggest software updates in company history. It could certainly drive flagging iPhone sales higher.
Perhaps fueled by these new products, Apple is anticipating a return to revenue growth in the June quarter, with sales projected to rise in the low-single digits. Thus, while Apple stock has been a laggard over the past year, this might be a good time to consider buying back in.
