“By far the most significant (and unexpected) part of Apple’s quarterly report was the announcement that the company is increasing its share buyback program from $10 billion to $60 billion,” Matthew Frankel writes for The Motley Fool. “A higher dividend is nice, as it creates a “price floor” effect. As the share price of a high dividend stock drops, at some point the yield will become so high as to attract new investors. At $400 per share, Apple currently pays around 3%, including the dividend increase announced with the recent report. If shares were to fall to say, $300, Apple would yield over 4%, and serious income investors would find the stock much more attractive. However, the dividend does nothing to increase the intrinsic vale of the stock, and is not the best way to return more capital to investors.”
“hankfully, Apple was thinking the same way, and as Tim Cook put it, “We concluded that investing in Apple was the best.” The buyback increase is much more significant than it seems. By increasing the buyback to such an unprecedented level, Apple is telling the market, ‘our shares are so cheap at these prices, that the absolute best way that exists to use $50 billion in cash is to buy some of our own stock at this amazing discount,'” Frankel writes. “How big is the buyback? At $400 per share, a $60 billion buyback equals 150 million shares, or almost 16% of the entire float. This is a tremendous amount, especially considering the company intends to complete this in just over two and a half years, by the end of 2015.”
Frankel writes, “When you combine the almost certain lull in anything new from Apple between now and the fall with the fact that the market simply doesn’t trust that the company has any real innovations left, this creates a great opportunity to accumulate shares if you believe that the company still has some tricks up its sleeve and is grossly undervalued. I believe that, and as of this past week, so does Apple.”
Much more in the full article here.