Apple shows how to spend billions of dollars — the smart way

Apple shows how to spend billions of dollars — the smart way

Being the world's largest technology company has its perks, including a stream of almost limitless cash. But the law of large numbers also starts to kick in, and a company of Apple's size doesn't seem capable of doing super productive things with all this money.

Tim Cook seems to be implementing an intelligent two-pronged strategy to use the cash. Part one is to return some of the cash to shareholders. Apple now pays a healthy dividend of about 2%, or $1.88 per year. They've also bought back a bunch of stock. Buying back your own stock is effectively the same as returning money to shareholders because the buyback decreases the number of shares outstanding. The reduced share count means that earnings per share (EPS) goes up. When EPS goes up the share price usually follows.

But Apple's stock price is up 77% in the last 15 months, as explained by Bloomberg. Apple seems to have great timing. The stock climbed more than 25% after the early 2012 share buyback, and another 32% following the 2013 buyback.

We should have expected at least a small percentage gain driven by the mechanics of the buyback (and the resulting EPS increase), but Apple actually seems to have a really good handle on when its stock is worth buying. Investors often look at stock buybacks as a signal of confidence from management. But sometimes management holds onto unrealistic, unsupported confidence. Not all C-level management teams know how to time their own stock. Cook and team certainly don't seem to have this problem.

The second strategy seems to be vertical integration. As Fortune explain , Apple is continuing to act in keeping with Steve Jobs' desire to control the primary technology behind everything they do. Over the past few years Apple got a lot of attention for its successful use of ARM-based chips in iOS devices. And now this week … Apple has flipped the switch on its own gigantic content delivery network (CDN).

What does it mean, long term, for Apple to have its own delivery mechanism for content? Could it be meaningful for Apple to escape its past reliance upon Akamai and Level 3? I'm honestly not sure. But I think if Apple feels it needs to spend $100 million (so far) building this network, there must be a bigger picture reason beyond the distribution of iOS and MacOS updates. Otherwise they could equally well argue that they need to own Tesla Motors so their employees can safely get to and from work. There has to be something more to this … something that is expected to scale to such a degree that Apple really wants to control the technology all by itself. Let the speculation begin.

Apple is a giant, and it's nice to see that the company is making good strategic use of its capital.

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Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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Reader comments

Apple shows how to spend billions of dollars — the smart way


(Without reading much on this topic)
I would assume / hope that this was for iCloud Drive. This has to be rock solid. It is no longer an inaccessible landfill for backups, it is where almost every iOS / Mac user is going to store their files, at the capacity of their choice. I for one only really want a rock solid iPhoto backup with the ability to access my library from any device at any time. If I'm going to be paying a premium for this service, and trust it with my > decade of memories, it must be infallible. (On top of my NAS & annual Blu-ray backups)

I am also glad they are spending their money on useful frontiers*
"Easy is expensive"

*then again... Beats.

Sent from the iMore App

It's as if some large shareholder with a large following had private meetings with cook and gave him a strategy, then made that that strategy public. What would Icahn do?

I don't really know what CDN means, beyond its name. Could it be used by Apple for it to run it's own carrier network, to rival TMobile, or EE, Vodafone etc.?

I can see it would be appealing to have its own mobile network...

CDN, in the simplest terms. Apple Pays ISP's (Internet Service Providers) So they can move more data at higher speeds. Without this they'd be limited like all other small businesses. This is where the whole net neutrality thing kicks in where people want all companies to have the same speed so the bigger companies don't have a benefit over the smaller companies.