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Buying back an additional $50B in stock estimated to boost Apple's 2014 EPS by $4.25

post #1 of 30
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If Apple were to heed the advice of investor Carl Icahn and increase its share buyback program, it could have a quick and significant effect on the company's stock, a new analysis has found.

Deutche


Analyst Chris Whitmore of Deutsche Bank analyzed a possible financial outcome if Apple were to increase its existing share buyback plan. In his scenario, another $50 billion worth of shares purchased at an average price of $500 would add about $4.25 in earnings per share in the company's fiscal year 2014.

In Whitmore's estimation, that would be an increase of about 10.5 percent over the year. He believes Apple's current $140 per share of net cash would be enough for the company to undertake such a strategy.

In addition, a $50 billion buyback at $500 per share could be self funding, the analyst believes. He noted that interest expenses on debt needed for the buyback would be about $1 billion ? an amount that would be offset by dividend payments reduced by $1.2 billion, thanks to retiring dividend-bearing common stock.

For those reasons, Whitmore agrees with Icahn, who revealed he spoke with Apple Chief Executive Tim Cook last week, and advised him to buy back more stock. Icahn didn't publicly disclose just how much stock he believes Apple should buy back, but the company's current plan calls for it to repurchase $60 billion worth of shares through 2015.

Icahn also said he is bullish on AAPL stock, and has invested $1.5 billion into the company. The support from Icahn, as well as growing hype over an anticipated iPhone event on Sept. 10, helped push shares of AAPL north of $500 last week.

Whitmore's projections published on Monday are somewhat similar to those of Amit Daryanani of RBC Capital Markets, who said last week he believes Apple could nearly double its current $60 billion share buyback program. Daryanani's estimates see that strategy adding about $4 to Apple's fiscal year 2014 earnings per share, representing an increase of about 10 percent.
post #2 of 30
I trust the current Apple board of directors more than I trust Icahn.

Proud AAPL stock owner.

 

GOA

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Proud AAPL stock owner.

 

GOA

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post #3 of 30

Do any of these investors or analysts actually care about Apple as a company or do they only care about AAPL and its potential for income? I wonder how many of them actually own anything from Apple. Of course, that's not a requirement for owning the stock but it says a lot about the person if they're willing to use the product they're investing in.

 

disclaimer: I finally own some AAPL but definitely care more about Apple's longevity than I do about making any money on AAPL.

post #4 of 30
'Whitmore agrees with Icahn, who revealed he spoke with Apple Chief Executive Tim Cook last week, and advised him to buy back more stock."

Apple taking advise from outside investors? Oh please NO!
post #5 of 30

Icahn's vocal involvement has me more concerned than any fake b.s. worries about Apple expressed over the 2 years.

He's the epitome of 'short term thinking', and poison for every company he touches.

 

I'm more decided than ever to bail at $600, at least to the tune of 50%.

post #6 of 30

IBM has been buying their own stock for DECADES.  There share count is almost 50% less than its peak.

 

Bottom line is this:  If Apple believes the stock price is severely undervalued, buying stock is a great idea.  Even Buffet gave this advice to Mr Jobs. 

 

If there are no companies to acquire at a decent price, they have a balance of over $150B, no short or mid term crisis and stock is undervalued, THEN BUY.

 

By the way, the article is already outdated.  You ain't getting Apple shares for $500 and under for a VERY LONG TIME.

post #7 of 30

Why should Apple artificially support the stock at a time when it is rising anyhow? As long as the "import" of foreign funds and their taxation are unknown, there is no need to feed speculators. A few bad news (legit or not) can destroy all gains from such a buyback (and subsequently all the non-virtual money used for it). And as we have seen how influential people like Icahn are, just him tweeting he's selling AAPL now could destroy $50b in no time.

post #8 of 30
Quote:
Originally Posted by AppleInsider View Post
In his scenario, another $50 billion worth of shares purchased at an average price of $500 would .....

Leaving aside all sorts of other arguments, I stopped reading his drivel right there.

post #9 of 30
And a stock buyback improves Apple's competitiveness and profitability how?

What I like about Apple is that they didn't put a lot of emphasis on stock price gimmickry. I hope they stay on that path.
post #10 of 30
I doubt any of these greedy hedge fund managers ever care anything about the companies they're draining. It's all about them turning a quick buck and then running off to drain some other company. They're a rather disgusting bunch of people but I guess they reap the benefits that most of us will never see. You can tell the type of companies these hedge funds like to pump. Usually, they're not making much in the way of profits but they can be pushed rather high to sucker the retail investors and then they drop the hammer. The hedge funds race from quarter to quarter, pumping and dumping as fast as they can. I'd be surprised if any of those people actually owned Apple products from the way they talk about how great and powerful Android OS is and how perfect Android devices are.

As an Apple investor I'm in it for the long haul. I do like those dividends and I hope Apple increases them every year. Apple may never reach $700 ever again, but hey, I never expected Apple to get that high in the first place. I bought most of my shares well below $100 and when Apple reached $500 I figured that was as good as it got. I don't know much about buy-backs but I'd prefer Apple to start acquiring businesses unrelated to hardware to make the company more stable but then again I have to depend on Apple knowing what to do because it's a rather profitable company already.
post #11 of 30
Increasing the stock buy-back has the effect of rewarding recent investors such as Icahn, as much as it does long-term Apple stock holders. Apple's cash reserves were built up over an extended period. Not just since Icahn made his big purchases. While Icahn has done nothing illegal, and any other investor (who had the funds) could do the same thing, I don't think that Apple should change its plans for Icahn.

What this article does not seem to mention is that a lot of Apple's cash is held overseas, and bringing it back to the US to fund stock buy-backs will incur a huge double-taxation and lessen the purchasing power of that money. So Apple will have to spend a lot more cash than the article tries to claim.

Apple should stick to its original plans.
post #12 of 30
Msimpson, most of the analysts and Icahn want Apple to incur more debt to fund more stock purchases instead of repatriating the overseas money.

This is completely the wrong thing for Apple to do in my opinion, but some others here have disagreed with me since Apple is currently earning a lot of cash.

Short-term thinking is directed at getting as much of Apple's cash as possible as fast as possible.

As the company prepares to unleash an avalanche of new long-term hardware and software products, Wall Street is squarely focused on short-term.
post #13 of 30
Quote:
Originally Posted by sog35 View Post

IBM has been buying their own stock for DECADES.  There share count is almost 50% less than its peak.

Bottom line is this:  If Apple believes the stock price is severely undervalued, buying stock is a great idea.  Even Buffet gave this advice to Mr Jobs

If there are no companies to acquire at a decent price, they have a balance of over $150B, no short or mid term crisis and stock is undervalued, THEN BUY.

By the way, the article is already outdated.  You ain't getting Apple shares for $500 and under for a VERY LONG TIME.

That's the part that people keep missing. It's not just Icahn saying this - Buffett said the same thing.

The stock is clearly undervalued and has declined a lot over the past year. Apple has plenty of cash (even if you ignore the cash overseas). A massive buy-back was only logical. I can see arguing against the dividend - it's not a very efficient way to get money back to shareholders because of taxes. But there's really little downside to a share buyback in this case.

One could also argue that borrowing money to buy back shares has some risk, but Apple can buy back plenty of shares without borrowing-even ignoring the money that's overseas.
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post #14 of 30
Quote:
Originally Posted by rob53 View Post

Do any of these investors or analysts actually care about Apple as a company or do they only care about AAPL and its potential for income? I wonder how many of them actually own anything from Apple. Of course, that's not a requirement for owning the stock but it says a lot about the person if they're willing to use the product they're investing in.

 

disclaimer: I finally own some AAPL but definitely care more about Apple's longevity than I do about making any money on AAPL.

 

No, they care only about short term profits and boosting the stock price. They couldn't care less about Apple as an important company. They will milk it for all it's worth, then kick the carcass as they move on to the next victim. And there will always be another company they can stick their mosquito-like proboscises in and start sucking money out.

post #15 of 30
If the cost of buy back would be equaled by the savings in dividends, why not just go back to not paying dividends? Same-same.
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post #16 of 30
Quote:
Originally Posted by Robin Huber View Post

If the cost of buy back would be equaled by the savings in dividends, why not just go back to not paying dividends? Same-same.

Not quite.

 

1) Dividends are rarely reversed and if/when they are, the stock tends to plummet -- there is a de facto permanency to them. Buybacks are one-time.

 

2) Tax consequences for the shareholder are better with buybacks, since they can cash out at the capital gains rate.

 

3) The repurchased stock can be subsequently re-issued to cover employee stock option exercises, thereby substantially mitigating dilution consequences (assuming it was bought back at a price lower than the one that prevails at the time of the option exercise).

 

4) It can be a very smart way to implement a capital structure change (i.e., take on more leverage, assuming that is the sensible thing to do given the nature of the business and its expected future cash flows).

post #17 of 30
Quote:
Originally Posted by Robin Huber View Post

If the cost of buy back would be equaled by the savings in dividends, why not just go back to not paying dividends? Same-same.

Wow. You completely missed the point.

Apple pays $1 B in dividends - shareholder gets $1 B (less applicable taxes, so they probably take home $650 M)

Apple stops paying dividends - shareholder gets nothing

Apple buys back stock - shareholder gets $1 B increase in share value which they can keep or sell. If they sell, they only pay 15% or so in taxes).

Not paying dividends isn't even remotely close to buying back stock and using the money to pay interest.
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post #18 of 30
Quote:
Originally Posted by jragosta View Post


That's the part that people keep missing. It's not just Icahn saying this - Buffett said the same thing.

The stock is clearly undervalued and has declined a lot over the past year. Apple has plenty of cash (even if you ignore the cash overseas). A massive buy-back was only logical. I can see arguing against the dividend - it's not a very efficient way to get money back to shareholders because of taxes. But there's really little downside to a share buyback in this case.

One could also argue that borrowing money to buy back shares has some risk, but Apple can buy back plenty of shares without borrowing-even ignoring the money that's overseas.

I agree with your comments.  I also agree with the comments from many other posts and think most who hold Apple stock are in it for profit.  And, many investors care little about the long term health of Apple.

To add to your comments - the buyback is not an "either/or" situation.  It can be good for all, for a number of reasons.  Some aren't happy Apple borrowed money for the buyback, but it does avoid the repatriation issue, and has some (~2.5%) savings in their dividend disbursement.  

 

One thing some may not considering is stocks, that are part of the buyback, aren't gone.  They are still an asset of the company, and can be reissued at a later date.   My prediction is the buyback will not cost Apple anything, and more likely than not, will end up being profitable for Apple.

 

Another issue, which could be important to Apple, is employee retention and morale.  A decrease in the stock price can affect some employees - at least, to some level.  While it may not be a game changer for employees, a decrease in stock price can be a distraction and drag on their psyche.

post #19 of 30

I think many people who are bashing an increase in buyback (or any buyback at all) need to read more articles about finance.  Get educated then come back here and return with an informed decision.

 

Just because Ichan may be a short-termer does not mean his suggestions are bad for Apple long-term.  Its just basic capital allocation which any fortune500 company should master.  You can focus on innovation AND still run a great capital allocation program (See Buffets strategy he's been using for decades).  They are NOT mutually exclusive.  That's why you have a CFO. 

 

Bashing all buybacks is the equivelent of telling a small mom and pop business to not shop around for the best interest rates on loans since that is focusing too much on 'financial gymnastics' and not on the core business.  Stupid.  You can and should do both.

 

Its real easy to say 'Apple should just acquire companies'.  Its not that easy.  Look at the disaster with Google's purchase of Motorola.  They are literally lost billions of dollars since acquisition. 

post #20 of 30
Quote:
Originally Posted by Michael_C View Post

One thing some may not considering is stocks, that are part of the buyback, aren't gone.  They are still an asset of the company.....

Nonsense. They are not.

 

Add: They become "contra-equity".


Edited by anantksundaram - 8/19/13 at 1:37pm
post #21 of 30
Historically, buybacks haven't been very successful. Apple is a relatively high priced stock. Would you devote all your money to AAPL at $510? The cash Apple holds today offers the company staying power and flexibility. They should invest better than 0% interest to be sure. But buying purely its own stock makes returns more volatile for shareholders. There is also a better than 50% chance it simply destroys good cash with nothing to show for it. Because Apple without the cash must produce same earnings as before. If not, the enhanced EPS is toast _AND_ you have no Fort Knox of money for the company to fall back on.

So today's AAPL shares would not necesssarily be worth more in a buyback scenario than they are now. Buybacks have gone wrong plenty of times before.
post #22 of 30
Quote:
Originally Posted by bwik View Post

Historically, buybacks haven't been very successful. Apple is a relatively high priced stock. Would you devote all your money to AAPL at $510? The cash Apple holds today offers the company staying power and flexibility. They should invest better than 0% interest to be sure. But buying purely its own stock makes returns more volatile for shareholders. There is also a better than 50% chance it simply destroys good cash with nothing to show for it. Because Apple without the cash must produce same earnings as before. If not, the enhanced EPS is toast _AND_ you have no Fort Knox of money for the company to fall back on.

So today's AAPL shares would not necesssarily be worth more in a buyback scenario than they are now. Buybacks have gone wrong plenty of times before.

 

Where on earth do you get this 50% figure from?

 

If you are so sure you should short the stock and you will make millions.

 

History means nothing.  Please don't say Microsofts buyback was a disaster in 1998-2000.  Their PE was 72.  Show me another company that had similar PE/earnings/cash as Apple that failed with a buyback.

 

"Apple is a relatively high priced stock" - is this a joke? Until recently DELL has a higher PE than Apple.  Apple's PE is about 40% lower than the S&P500 average.  With DELL's PE, Apple would be $720.


Edited by sog35 - 8/19/13 at 1:53pm
post #23 of 30
Quote:
Originally Posted by Richard Getz View Post

'Whitmore agrees with Icahn, who revealed he spoke with Apple Chief Executive Tim Cook last week, and advised him to buy back more stock."

Apple taking advise from outside investors? Oh please NO!

 

Icahn can spin his speaking with Tim Cook any way he wants. Cook is probably unable to respond to such claims directly and I seriously doubt he gave preference to Carl Icahn anyway. Just another shill trying to 'sell' something to Cook... Another day, another loudmouth.

Proud AAPL stock owner.

 

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Proud AAPL stock owner.

 

GOA

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post #24 of 30
Quote:
Originally Posted by sog35 View Post

 

Where on earth do you get this 50% figure from?

 

If you are so sure you should short the stock and you will make millions.

 

History means nothing.  Please don't say Microsofts buyback was a disaster in 1998-2000.  Their PE was 72.  Show me another company that had similar PE/earnings/cash as Apple that failed with a buyback.

 

"Apple is a relatively high priced stock" - is this a joke? Until recently DELL has a higher PE than Apple.  Apple's PE is about 40% lower than the S&P500 average.  With DELL's PE, Apple would be $720.

 

I am well aware of the theoretical basis for buybacks. 50% was my guess at the buybacks that are unadvisable in retrospect, because they boost share prices less than cash value -- sometimes not at all. About PE, I would expect Dell's PE is much higher than Apple, because their prospect for earnings _growth percentage_ is much higher than Apple. If they fix things, earnings could go 10x higher. Not possible with Apple.
post #25 of 30
Quote:
Originally Posted by bwik View Post

 

I am well aware of the theoretical basis for buybacks. 50% was my guess at the buybacks that are unadvisable in retrospect, because they boost share prices less than cash value -- sometimes not at all. About PE, I would expect Dell's PE is much higher than Apple, because their prospect for earnings _growth percentage_ is much higher than Apple. If they fix things, earnings could go 10x higher. Not possible with Apple.

 

Now that takes the cake.  You say DELL has a brighter future than Apple?  Are you serious?  Its main source of revenue (Desktops/Laptops) is being demolished by Apple's main source of revenue (phones/tablets).  Don't you think the PE should take into consideration that DELL could be bankrupt in 5 years?  I mean seriously.  With that type of analysis the smallest companies on the market should have PE's of 1000 since they have a remote chance of increasing earnings by 100x.

 

So tell me what should Apple do with the money?

 

1. increase dividend.  Just increases taxes for investors.

2. save the money.  They are losing 2-3% from inflation alone on the reserve cash that is liquid

3. buy companies.  Look at the disasters with recent tech acquisitons by HP, Microsoft, and Google.

 

Apple is generating 40-50B of free cash flows a year.  They have 150B in cash.  Unless they are planning on making a huge 100M acquistion in the near future there is no reason to hoard over 200B in cash.

post #26 of 30
Quote:
Originally Posted by bwik View Post

Historically, buybacks haven't been very successful. Apple is a relatively high priced stock. Would you devote all your money to AAPL at $510? The cash Apple holds today offers the company staying power and flexibility. They should invest better than 0% interest to be sure. But buying purely its own stock makes returns more volatile for shareholders. There is also a better than 50% chance it simply destroys good cash with nothing to show for it. Because Apple without the cash must produce same earnings as before. If not, the enhanced EPS is toast _AND_ you have no Fort Knox of money for the company to fall back on.


So today's AAPL shares would not necesssarily be worth more in a buyback scenario than they are now. Buybacks have gone wrong plenty of times before.

STUPID buybacks have failed. Sure. But intelligent buybacks generally produce value.

It all comes down to evaluating the situation. If your PE is 100, a buyback doesn't make as much sense as it does for a PE at 10. If you're financially healthy, a buyback makes more sense than if you're struggling. If you have to choose between buyback and investing in R&D, then a buyback is a horrible idea. OTOH, if you have plenty of cash to invest in R&D and buying businesses and STILL have more than you need, then it can be a wise use of funds.

In short, anyone saying that buybacks are good or bad in general is a fool. Obviously, there have been a lot of buybacks that never should have happened. But there are also buybacks that have been very successful for the investors - and since Apple falls into the 'good' category in all of the above criteria, its chances of success are very high.
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post #27 of 30
Quote:
Originally Posted by bwik View Post

I am well aware of the theoretical basis for buybacks. 50% was my guess at the buybacks that are unadvisable in retrospect, because they boost share prices less than cash value -- sometimes not at all.

That's not a relevant comparison at all. Even if 90% of buybacks were a failure, one wouldn't assume that Apple's will be a failure. An intelligent investor would evaluate them and determine WHY they failed and then see if Apple has any of the signs that are likely to lead to failure. Most buybacks fail because of extremely high PE, attempts to hide financial weakness, and feeble attempts to prop up a stock with no intrinsic value. Apple has none of those things. One can't assume that because the average buyback 'failed' (even if that were true) that Apple's would.
Quote:
Originally Posted by bwik View Post

About PE, I would expect Dell's PE is much higher than Apple, because their prospect for earnings _growth percentage_ is much higher than Apple. If they fix things, earnings could go 10x higher. Not possible with Apple.

ROTFLMAO. By that standard, my local Mom and Pop grocery store should be worth more than Walmart because it has more room for growth.

Evaluation of the businesses indicates that Dell is a disaster:
- Declining sales and profits over an extended time
- No differentiation at all
- Competitive disadvantage due to higher costs than some competitors
- Declining customer satisfaction
- Perception as an inferior brand
- No innovation over the past 20 years

Sure, if Dell were to turn into Apple, their sales would skyrocket. But there's no plausible scenario where they will re-engineer themselves into a dynamic, profitable, growing company.
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post #28 of 30
Quote:
Originally Posted by sog35 View Post

 

Now that takes the cake.  You say DELL has a brighter future than Apple?  Are you serious?  

 

Apple is generating 40-50B of free cash flows a year.  They have 150B in cash.  Unless they are planning on making a huge 100M acquistion in the near future there is no reason to hoard over 200B in cash.

 

Exactly.  So do you really think Apple can generate 400-500B per year in cash?  Are _you_ serious?

 

Dell today makes 1 billion per year.  If they really do great work, they might get it to 10 billion per year.  Maybe even more.

 

So yeah... guy... what I said was right... and that's why Dell would have a higher P/E ratio today than Apple.  They have some prospect for profit growth percentage.  Apple has barely any.  It's simple math really.  Thanks for your interest.


Edited by bwik - 8/20/13 at 7:41pm
post #29 of 30
Quote:
Originally Posted by bwik View Post

 

Exactly.  So do you really think Apple can generate 400-500B per year in cash?  Are _you_ serious?

 

Dell today makes 1 billion per year.  If they really do great work, they might get it to 10 billion per year.  Maybe even more.

 

So yeah... guy... what I said was right... and that's why Dell would have a higher P/E ratio today than Apple.  They have some prospect for profit growth percentage.  Apple has barely any.  It's simple math really.  Thanks for your interest.

 

That's simpleton math there bro.  Just because there is a EXTREMELY REMOTE chance that Dell can improve their earnings by 10x does not mean they should have a higher PE.  If thats the case than Joe's Pizza Place should have a PE of 100,000.  Cause they only have earnings of $100k a year and there is a REMOTE chance they could increase his earnings by 100x.  Ridiculous.

 

Simpleton math.  You also need to calculate the probability that DELL actually increases their earnings by 10x.  And that probability would be .0000000001%.  DELL has an better chance of having their earnings DECREASE 10x.  Do you SERIOUSLY think DELL can have earnings of 10BIL?  Thats the same as powerhouse GOOGLE. No. Way. IN. HELL. 

post #30 of 30
Originally Posted by bwik View Post

Dell today makes 1 billion per year.  If they really do great work, they might get it to 10 billion per year.  Maybe even more.

 

I'd like to take this opportunity to remind you that you're talking about Dell here. DELL. That Dell.

Originally posted by Marvin

Even if [the 5.5” iPhone] exists, it doesn’t deserve to.
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Originally posted by Marvin

Even if [the 5.5” iPhone] exists, it doesn’t deserve to.
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