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Apple - surprise dividend increase lifts shares

George Salmon | 1 May 2019 | A A A
Apple - surprise dividend increase lifts shares

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Apple Inc Com Stk NPV

Sell: 318.07 | Buy: 318.12 | Change 1.38 (0.44%)
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Apple has reported second quarter revenue of $58bn. While that's 5% below the same period last year, dragged down by lower iPhone sales, it's at the top end of the group's guidance range. It's a similar story for profits, with earnings per share down 10% to $2.46, but ahead of analysts' forecasts.

The group also unexpectedly increased the quarterly dividend by 5% to $0.77 per share and increased the share buyback.

The shares rose 5.4% in after-hours trading.

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Our view

Apple's success was built on a series of ground-breaking products, each more innovative than the last. Unfortunately it's been a while since we've seen anything truly revolutionary. That's creating headwinds for iPhone sales, but Apple's growth story is more software than hardware.

But let's start with the iPhone issues. The lack of innovation, coupled with a longer lifespan for existing iPhones, means it's harder to justify regular upgrades. Especially since rivals are closing the technology gap at a fraction of the price.

External factors are hardly helping either. The economic backdrop remains uncertain and the battleground in the ongoing trade war between the US and China has turned to tech. That's squeezed sales trends in China, which had been a key growth market.

But it's not all doom and gloom. At Q2 results CEO Tim Cook said pressures in the Far East are easing, so hopefully trends will improve. And longer-term, investors should remember it's not all about price and technical spec. Apple has successfully positioned itself as an aspirational, yet accessible brand. That boosts loyalty.

If a 1bn+ customer/fan base is Apple's trump card, the mushrooming Services division is Apple's way of playing it. Charging subscriptions for its music service and getting fees from app developers to use the App store, have helped revenues grow rapidly.

Services is now comfortably Apple's second largest division. Margins are high and revenues should be reliable - which all being well will take the pressure off the group to deliver constantly rising hardware sales.

Of course, it won't be as simple as all that. Declining iPhone sales are hurting, and the outlook is further muddied by a legal settlement with Qualcomm. Apple had been fighting charges around essential smartphone technology, but has now dropped the case. That could see costs rise.

Over the years, Apple has generated shed-loads of cash. Until recently, that was being hoarded on the balance sheet. A change in policy means it's now finding its way back to shareholders through a share buyback program and dividend.

The shares offer a prospective yield of 1.7%. That may not be large, but it's more than others in the US tech sector.

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Q2 Trading details

iPhone, the largest contributor to Apple's revenue, fell 17.3% to $31.1bn. That represents the group's biggest year-on-year drop in sales of the flagship product, due to lapping the iPhone X launch, weaker pricing and tough conditions in China.

Mac sales were also down, falling 4.6% to $5.5bn, but the other divisions delivered strong growth.

Sales of iPads rose 21.6% to $4.9bn, with wearables up 30% to $5.1bn and the Services business, which includes the Appstore, Apple Pay and Apple Music, growing 16.2% to $11.5bn.

Operating profit of $13.4bn translated into a free cash inflow of $8.8bn. After distributing $27bn in stock repurchases and dividends in the quarter, the group's cash balance dipped from $130bn in Q1 to around $112.7bn.

Looking ahead, Apple is expecting revenue of between $52.5bn and $54.5bn next quarter, with a gross margin between 37% and 38% and operating expenses of $8.7bn to $8.8bn. That'd lead to an operating profit of between $10.6bn and $12bn.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.