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Apple's cash plan takes heat off Cook, buys him time

Apple CEO Tim Cook speaks to the audience during an Apple event in San Jose, California October 23, 2012. REUTERS/Robert Galbraith
Apple CEO Tim Cook speaks to the audience during an Apple event in San Jose, California October 23, 2012. REUTERS/Robert Galbraith

By Poornima Gupta and Ben Berkowitz

(Reuters) - Tim Cook wants investors to "think different" about Apple: less as a hyper-growth startup-like company and more as a mature but robust technology corporation with the world's biggest dividend.

If Wall Street follows Apple Inc's famous advertising slogan of old, it may relieve some of the pressure on Apple's chief executive, quiet investors' grumbling about its recent share price slide, and buy the company time to do what it says it does best: come up with and market new products.

On Tuesday, Apple said it would return $100 billion to shareholders by the end of 2015, in part by raising its dividend 15 percent and in part by increasing its share buyback program six-fold to $60 billion.

To some extent, the expanded capital return program helped mask its first quarterly profit decline in a decade, though analysts say the more important issue now is what Apple has in store on the gadget front.

Apple shares were up 0.2 percent to $406.96 in afternoon trading on Wednesday, reversing direction after falling about 1 percent in early trading. The stock has seen a 43 percent slide since mid-September.

With Apple planning to borrow money to reward shareholders - one way to circumvent repatriating its vast overseas cash for that purpose - it could go from having zero debt to a company that rivals major global banks such as Citigroup in issuing bonds.

The company received an AA+ rating from Standard & Poor's, missing the top rating due to earnings growth uncertainty.

Following the earnings, at least 17 brokerages lowered their price targets on the stock, including JPMorgan, which cut its target by 25 percent.

Apple's earnings growth trajectory has come to earth in the last year. After posting average annual earnings per share growth of 62 percent over the past five years, its profit is now forecast to grow at just 4.5 percent a year for the next decade. For this year, earnings per share are expected to fall 4.4 percent, according to Thomson Reuters StarMine data.

ADMITTING A CHANGE

Cook is trying to reset heightened expectations around a company once universally feted for its ability to captivate both consumers and Wall Street.

In the years following the introduction of the iPhone in 2007 and the iPad in 2010, the company established a pattern of consistently blowing past even the most bullish Wall Street earnings expectations, much to everyone's delight.

But on Tuesday, Cook made the rare admission to analysts on a conference call that Apple's growth has slowed and margins have decreased.

Apple is a mature company that's now trying to get everyone to see it as one, analysts say.

"They are modulating into a state where the highs are not as high and lows are not so low," Forrester analyst Sarah Rotman Epps said.

Apple shares moved 5 percent higher Tuesday on the back of the capital program, though the gains evaporated later.

Any gains would have come as little consolation to investors who have watched Apple shed more than $280 billion in market value in the last few months as investors adjusted to a new, slower-growth reality.

Roger Kay, president of researcher and consultant Endpoint Technologies Associates said the expanded share repurchase and dividend scheme would keep investors satisfied for a while.

In the longer term, Apple needs another blockbuster gadget to accelerate its momentum and win investors back for the longer term. Cook tried on Tuesday to drum up enthusiasm around the product pipeline by teasing that "some really great stuff," potentially in new product categories, was coming in the fall and in 2014.

"They need something that breaks into new verticals, whether it's TV or something that's wearable, that opens up a new revenue stream," Epps said.

RESETTING THE SCALE

That remains among the most pertinent concerns for Apple-watchers. Since Cook took over in 2011 from late co-founder Steve Jobs, some investors have questioned whether Apple can continue to up-end technology markets with new revolutionary products that appeal to consumers in the absence of the tech icon.

Cook has in the past year presided over three straight quarters of missed revenue expectations before the January-to-March period. The key product introduced during his tenure is the smaller iPad mini, a response to tablets such as Amazon.com Inc's Kindle that were making inroads on its home turf.

The public takes as a given that a new iPhone and new iPads will come this year, along with refreshed Mac computers and iPod music players. But the speculation is that Apple is also working on a watch, a television and a radio service, among other products in the pipeline.

Cook would not provide any more details on new products, no surprise given the company's penchant for secrecy.

Some investors remain confident the Apple magic remains.

"The bar has been reset in terms of expectations and guidance. They have done the right thing by issuing debt and doing a large buyback," said Jason Jones, who runs tech hedge fund firm HighStep Capital and confessed to being an Apple bull.

"The company will go through this quiet period for product release and then, starting in the summer and for the remainder of the year, product announcements will pick up and likely the stock will react favorably to that."

While Apple is still growing - no small achievement for a company with sales well over $100 billion - its pace of growth has slowed as high-end smartphone adoption approaches saturation and rivals flood the market with cheaper devices, which are popular in high-growth developing countries like China and India.

Cook on Tuesday acknowledged that Samsung, which has smartphones in all price categories, is its top competitor. Apple also said it does sacrifice margin in the short-term, as it did with the iPad mini, if executives believe a product has long-term potential.

"Apple is in the transition phase from growth to a value company," said Tim Ghriskey, chief investment officer of Solaris Asset Management. "Growth companies tend to put every penny back in, but that is not the case with Apple here."

(Additional reporting by Alistair Barr in San Francisco and Dan Burns in New York; Editing by Edwin Chan and Ken Wills)

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