Apple CEO Seeks to Stem Growth Concern by Returning Cash

April 24 (Bloomberg) -- John Sculley, former chief executive officer of Apple Inc., talks about Apple's fiscal second-quarter earnings and Ford Motor Co.'s first-quarter profit. Sculley speaks with Tom Keene, Anand Srinivasan, Scarlet Fu and Sara Eisen on Bloomberg Television's "Surveillance." (Source: Bloomberg)

Apple Inc. (AAPL) Chief Executive Officer Tim Cook is seeking to reassure investors dismayed by the company’s falling stock price and first profit drop in a decade by unveiling the largest buyback plan in corporate history.

The iPhone maker yesterday boosted its quarterly dividend and alloted more cash to buybacks, adding $55 billion to its plan to return cash to shareholders -- bringing the total to $100 billion through 2015. Cook made the announcements as Apple reported an 18 percent decline in earnings and acknowledged that growth will continue to slow.

Apple (AAPL) has come under pressure to release a new hit product that can live up to the success of the iPhone and iPad, sending the shares down more than 40 percent since September and wiping out about $280 billion in market value. Cook also took the unusual step of using a conference call with analysts to say that new products are in the works for later this year and through 2014, without giving details.

“There are a lot of unanswered questions, and that will persist for a while,” said David Walker, a technology analyst at Boston-based Trillium Asset Management LLC, which manages about $1.3 billion, including Apple shares. “This report didn’t give one reason to think this is the floor.”

Shares (AAPL) of Cupertino, California-based Apple slipped less than 1 percent to $405.46 at the close in New York. More than 20 analysts cut their target price for the stock after the earnings report.

Apple’s Valuation

The results underscore speculation that Apple’s era of rapid growth, fueled by the 2007 debut of the iPhone, may be over. Instead, the company is taking on more of the characteristics of a value stock, with steadier earnings and a recurring dividend, said Abhey Lamba, an analyst at Mizuho Securities USA Inc. based in New York.

“This plan will make value investors more aggressive,” he said.

Apple’s stock is now cheaper on a price-to-earnings basis than 92 percent of the companies in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Apple’s ratio of 9.7 puts it on par with struggling hardware makers such as Dell Inc. (DELL), which trades at 8.9 times current earnings, and well below Internet companies such as Google Inc. (GOOG), which has a ratio of 23.

Apple reported lower fiscal second-quarter net income amid shrinking profit margins and accelerating competition from Samsung Electronics Co. (005930) Earnings fell to $9.55 billion, or $10.09 a share, Apple said yesterday.

Margins Narrow

The company sold 37.4 million units of the iPhone, compared with 35.1 million a year earlier, when iPhone revenue surged 85 percent. Apple sold 19.5 million iPads, up from 11.8 million. It also sold 4 million Mac computers.

Apple isn’t profiting as much from those sales. Gross margins, a yardstick for measuring profitability, are under pressure amid higher-than-expected sales of iPads that are less profitable than other products, Apple Chief Financial Officer Peter Oppenheimer said on yesterday’s call. Gross margin narrowed to 37.5 percent in the second quarter, from 47.4 percent a year earlier.

The company predicted the trend will continue. Sales in the current period will be $33.5 billion to $35.5 billion, compared with an average projection of $38.4 billion, according to estimates compiled by Bloomberg. Gross margins will be will be 36 percent to 37 percent this quarter, Apple said, compared with 38.7 percent estimated by analysts.

Cook said on a conference call that while growth is slowing, it’s not the only metric Apple uses to judge success.

“We do want to grow faster,” Cook said. “But we don’t view it as the only measure of our health.”

New Categories

Cook said Apple is working on new products that will start being rolled out later this year, and is exploring entering new product categories.

Analysts including Gene Munster of Piper Jaffray Cos. had predicted the iPhone 5S would debut in June, and now anticipate that the new handset may not ship until September at the earliest.

Without being specific, Cook also referenced plans to introduce software and services along with existing offerings such as iTunes and iCloud. The company topped $4 billion in sales of applications, music, software and services for the first time in the recent quarter.

Services Shift

Cook may be influenced by International Business Machines Corp. (IBM), which in the early 1990s under then-CEO Louis V. Gerstner decided to focus on selling computer services, said Jason Moyer, president of New York-based Brand Value Advisors, a brand-marketing firm. By convincing consumers to buy its various products, he said, “Apple’s done a great job of getting a lot of hooks in the water. Why not capitalize on that ecosystem by selling them more services?”

While Apple has historically focused on pushing only its most recent products, Cook said he planned to continue to aggressively price older iPhone models to attract more cost-conscious shoppers, particularly people who haven’t yet purchased a smartphone.

Apple also is working on television products and a watch-like wearable device that’s connected to other Apple gadgets, people with knowledge of the matter have said.

Apple raised its quarterly dividend 15 percent to $3.05 a share, from $2.65, and boosted its share-repurchase program to $60 billion from $10 billion. To avoid paying taxes for repatriating overseas cash, the company said it will use the debt markets to fund the payout.

Buyback Surge

The plans help extend the biggest surge in stock buybacks since the 1980s. Buyback announcements reached $208 billion in the first three months of the year, the busiest first quarter since at least 1985, according to Birinyi Associates Inc., the Westport, Connecticut-based research firm founded by Laszlo Birinyi.

Cook faced pressure from investors including hedge fund manager David Einhorn of Greenlight Capital Inc. to return more of its cash. This was the first increase since Apple reinstated dividends last year.

“We applaud Apple’s decision to borrow money and return excess capital to shareholders, an idea that was off the table only months ago,” Einhorn said in a statement. “This positive development represents a more shareholder-friendly capital allocation policy and demonstrates the conviction of Apple’s management and board in the company’s future.”

Standard & Poor’s gave the company its AA+ grade, the second-highest level of investment grade, and Moody’s Investors Service ranked Apple an equivalent Aa1, according to statements issued by the ratings firms. Apple has no outstanding bonds, according to data compiled by Bloomberg.

‘Initial Euphoria’

One of Apple’s chief competitors is Samsung (005930), which in March unveiled the Galaxy S4 to challenge the iPhone in the high-end smartphone market. The Suwon, South Korea-based company is the world’s largest seller of handsets and relies on a strategy of using a wide range of devices. Apple, by contrast, tends to release a limited number of products each year.

Apple’s shares have tumbled 24 percent this year, making it the seventh-worst performer in the S&P 500 Index (SPX). After the stock rose in late trading yesterday, it pared its gains as analysts on the conference call focused their questions on the company’s shrinking margins and slowing growth.

“You had the initial euphoria and then people started to digest the numbers,” said Trillium’s Walker.

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net; Peter Burrows in San Francisco at pburrows@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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