“Apple is sitting on $178 billion of cash. What does Apple plan to do with its excess cash? It looks increasingly likely that Apple has already given us the answer: repurchase shares,” Neil Cybart writes for Above Avalon.
“Apple will most likely revise its capital return program in April, raising its share buyback authorization and quarterly cash dividend payout,” Cybart writes. “Assuming Apple relies on U.S. free cash flow and debt issuance to fund share buyback over the next three years, Apple is in a position to spend $150 billion on share buyback, repurchasing another 20% of its outstanding shares by 2017.”
“The wild card in this discussion remains AAPL stock price. A higher stock price will make share buyback less attractive, resulting in Apple buying back fewer shares. Conversely, a lower stock price would represent an attractive opportunity for Apple to ramp up its share repurchases,” Cybart writes. “Even after three years of aggressive share repurchase activity and paying quarterly cash dividends through 2017, Apple would have more than $225 billion of gross cash remaining on its balance sheet.”
Read more in the full article here.
A higher stock price will make share buyback less attractive, resulting in Apple buying back fewer shares. Conversely, a lower stock price would represent an attractive opportunity for Apple to ramp up its share repurchases,” Cybart writes
The current share price is not the real issue – it is what Apple expects the FUTURE share price to be. Since it alone knows its expansion and new product plans, it can judge what future sales/profits will be. If it sees continued significant expansion, then buybacks will continue.
I wonder if corporations have similar restrictions with stock sell/buy as other stock owners in the case of possible ‘insider’ trading..
Better to buy back yourself then to…
Of course, “kicking ass” seems to be Apple’s forte for the last decade.
Buybacks ONLY make sense as a way to increase share price when investors collectively lack confidence in the stock. It shows that the company’s leadership has confidence in the company’s future.
As long as AAPL is on an upward path, Apple is not going to buy back shares. No matter what the company is worth, it’s just a waste of money to reduce the number of shares outstanding when AAPL is already hitting all-time highs and investor-confidence is high. If AAPL goes up to $150, and then drop 20% on some real or contrived bad news, and stays there for an extended period, THAT would be a good time to do some more buy backs. So it makes sense to have the “authorization” to do it, but having authorization does NOT mean it will be exercised.
As the AAPL goes up, Apple will steadily increase the quarterly dividend.
I agree with your general premise that it is better for Apple to pursue stock buybacks when the price is low (or temporarily drops), and that the flexibility to do so is a positive thing.
I do not agree with your assertion that stock buybacks “…ONLY make sense as a way to increase share price when investors collectively lack confidence in the stock.” I do not see a lack of investor confidence as a prerequisite for initiating a stock buyback program. Besides, part of the intent of the buyback is to compensate for the ownership dilution that would otherwise occur from employee benefits programs, such as the massive stock grants going to upper management.
I also disagree with your statement that “As the AAPL goes up, Apple will steadily increase the quarterly dividend.” Dividends are driven by profits, not by stock price, although the profits and stock price are generally correlated. AAPL may go up or down for a variety of reasons, but dividends should be defined it terms of the level of cash outflow that can be sustained by ongoing business.
Since the assets used to buyback AAPL shares is share holder property, I find the MDN title of “buy back 20% of itself” to be a bit misleading. Through a buyback, a corporation reduces the number of outstanding shares, thus concentrating ownership among the remaining shares and slightly increasing the ownership sliver represented by each share. I don’t like MDN’s title because it might incite the “Apple taking itself private” from people who apparently know very little about how common stock works.
The decision on dividends, buybacks, acquisitions, reserves, etc., should be based on a strategic plan and business model, not the vagaries of the stock market or the capriciousness of analysts and “activist investors” like Icahn. That is one of the reasons that I like Apple management – they don’t dance to the Wall Street tune.
The general approach for corporate capital is that a company should retain sufficient assets for ongoing business, R&D, growth and construction of facilities, strategic acquisitions, and a reasonable reserve to cover economic downturns, natural disasters, etc. Anything beyond that – “excess” capital – can be invested by the company or returned to the shareholders. When larger stockpiles of money are involved, the general Wall Street wisdom is that the excess assets should be returned to the shareholders so that they can invest it as they see fit, possibly diversifying their investments and/or attempting to get a better return than the corporation is receiving on its cash and securities. In other words, if the corporation does not need or cannot effectively utilize the excess capital, then it should be transferred to the individual owners to do with as they see fit. I have no problem with that at all, as long as the activist investors don’t manipulate the system to pump and dump stocks for quick profits.
Stock buybacks are an indirect way to return money to the shareholders. It has the advantage of not resulting in capital gains taxes for the investors. Some people would prefer larger dividends, instead, to provide more income. I really don’t care at this point because I automatically reinvest the dividends in an IRA account. To me, a larger number of shares at a slightly lower price (dividend reinvestment) or a smaller number of shares at a slightly higher price (corporate stock buyback) is a wash. I do not need retirement income right now.
I’m not sure if a buyback reduces the number of outstanding shares in any permanent sense if those same shares are later part of a company’s C-level compensation package. What exactly will that 20% represent? Stock that is only in the hands of the company itself including unexercised stock options?