Apple (AAPL) is back, and we think this means all the difference in the world when it comes to driving price-to-fair value convergence. On Wednesday, the firm put up excellent fiscal second-quarter results. As the quarterly headline suggests, strong iPhone sales in emerging markets (thanks in part to China Mobile) drove record March quarter revenue and 15% earnings-per-share expansion. The $11.62 per share quarterly earnings number exceeded the consensus estimate by more than 14%, so it was a large beat. During the period, the company generated $13.5 billion in cash flow from operations and returned almost $21 billion in cash to shareholders through dividends and share repurchases. Apple also guided revenue in the fiscal third quarter to the range of $36-$38 billion, bounding the consensus view. The quarter was solid across the board, with gross margins advancing nicely due to higher-margin iPhone sales (nearly 60% of revenue). The company ended the quarter with a staggering cash balance of $150.6 billion.
The quarterly report wasn’t all the news, however. In a separate press release, the board announced that it has been very busy. First, it authorized another significant increase in its plan to return cash to shareholders. Apple’s share repurchase authorization has been raised to $90 billion from $60 billion previously, and the company approved an 8% increase to its quarterly dividend, to $3.29 per share ($13.16 per share annually, 2.5% annual yield). The company’s Valuentum Dividend Cushion score indicates that the firm’s dividend still has significant room for growth. In our view, Apple may become one of the best dividend growth gems over the next few decades (a Dividend-Aristocrat-to-be). The company also announced that it may access the public debt markets during 2014 to help manage the large cash stockpile domiciled overseas. International sales, for example, accounted for 66% of the fiscal second-quarter’s revenue. All-in, Apple expects to utilize a total of $130 billion of cash under its capital-return program by the end of calendar 2015, even as it remains open to large acquisitions. If that weren’t enough, Apple also announced a 7-for-1 stock split, which will go into effect June 9.
Our valuation thesis on Apple is progressing nicely, and we continue to hold shares of the firm in both the Best Ideas portfolio and Dividend Growth portfolio. We value the shares at $680 each (about $100 on a forward split-adjusted basis), so any buybacks are value-creative. We’re also huge fans of its dividend growth potential, and we think the path to price-to-fair value convergence has opened up significantly following the strong quarterly results and shareholder-friendly capital-allocation plans. Apple’s total return prospects—capital appreciation and dividend expansion–may be better than any other firm on the market today. If Apple wasn’t currently such a large position in both portfolios, we’d be looking to add to it.