Apple's Big Fat Dividend + Buyback Raises Stock Price- what is a dividend?

As I have said before, Apple is going up because of strong fundamentals, the company currently sits at 100 Billion in cash, and a P/E ratio of 17, and has been knocking the ball out of the park with their new, innovative products. Now they have formally announced a dividend and a stock buyback, and the stock price Jumped. 
I am going to take some questions from the audience to demystify what some of this stuff means, and how it affects the stock price.
Q: Look, I'm confused by all this, but I've always wanted to know, what the heck is book value?
A: Whatever Amazon is charging.
Q: Dude, why am I reading this?
A: Book value is what the company would be worth if you sold all its assets plus existing cash, and after all liabilities were paid, the left over money then returned to shareholders would be the book value. However, should that take place, the company would cease to exist, and shareholders would end up with only a lump sum payout.
I'm Warren Buffet and I approve this share buyback
Q: So why do stocks, like Apple, trade at higher rates than book value?
A: Because the company has intellectual property worth far more, or assets like real estate that were bought in 1970 that are on the books for 500k when their present value is 10 million dollars. Going forward, shareholders expect the company to grow, and innovate (much like Apple has,) so they're willing to pay for more than the company is "worth" book value wise.
Q: Does a company ever trade below book value?
A: Of course.
Q: So I should buy when that happens?
A: Not necessarily, sometimes accounting rules allow for "Goodwill" to be placed in the asset column even though it holds no real value. Plus sometimes book value is just a shennanagilistic creation of fiction?
Q: Shennanagilistic?
A: Exactly.
Q: So what about dividends?
A: Dividends are generally an indication by management that they believe ongoing business and cash flow is strong enough to justify a pay out shareholders.
Q: Yeah, but I still don't know what a dividend is.
A: It's a cash payment, generally made on a quarterly basis, representing a shareholders stake in the company.
Q: Sounds good to me. I like getting money.
A: Yeah, but you have to pay taxes on it. Plus if a company is growing rapidly, they can use those funds for new investments and products. That's why generally, older, more slow growth and mature companies that are the ones paying dividends.
Q: So now that Apple is paying out a dividend that means they're growing more slowly?
A: Not in Apple's case. They just happen to be King of the World and don't know what to do with their endless piles of gold. But in general, yes. Warren Buffet chairman of Berkshire Hathaway, doesn't pay out a dividend despite sitting on billions in cash, because he doesn't want investors to pay taxes on the money, and earn 2% in interest when he believes he can invest the same money at 10%.
Q: So what happens to a stock price when a dividend is paid out?
A: Let's take General Electric which pays out a 17 cent per share dividend per quarter, and with a stock price of $20. On the day that the company sets this money aside for shareholders, and takes it off its books (the X-dividend) the 17 cents gets subtracted from the share price, so the stock would open that day at $19.83.
Q: That sucks, so my shares are worth less, and I get taxed on the money I get paid?
A: Don't get your panties in a bunch, it's okay, a lot of people use that money as an income stream. It's like a salary as an owner of the company, there are times we all need cash right?

What are dividends and stock buybacks, and Apple (video)

Q: What do you think of Google?
A: Google has over $100 per share in cash, is expanding rapidly, and has a huge search cash cow, and is an example of oft inefficiently priced asset where cash does not appear to be taken into consideration as much as it should be. If you subtract the huge horde of cash from the stock price, the valuation of the company seems to plummet. Similarly Microsoft has over 1/7th of its value in cash on the books, making that 11.7 P/E ratio from ongoing operations look even cheaper.
Q: Okay, so what happens when a company does a share buy back?
A: It's a form of a dividend, without the taxes, since you never see the cash. The company buys back shares when they believe that the shares are priced low enough, and then burns the shares the buy. So if the company had 100 shares outstanding, bought back ten, there would be only 90 shares available. So if the company earned $100 for the year, that would not mean it earned $1 per share, it would mean the company earned $1.11 per share ($100 earned/ 90 shares outstanding) so earnings per share would have gone up 11%.
Q: That sounds shennanagilistic?
A: Not in this case, the company used previously earned cash to buy the shares and the cash comes off the books, much like it would if they paid you the cash directly.
Q: So what, I should be buying companies that pay me dividends. And the fact that Apple is paying one out and buying back shares is a bullish sign?
A: Warren Buffet would say so.
Q: Who's Warren Buffet again?
A: Have a great day!


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