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

Posted:
in AAPL Investors edited January 2014
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.
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Comments

  • Reply 1 of 25
    I trust the current Apple board of directors more than I trust Icahn.
  • Reply 2 of 25
    rob53rob53 Posts: 2,102member


    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.

  • Reply 3 of 25
    '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!
  • Reply 4 of 25
    gqbgqb Posts: 1,934member


    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%.

  • Reply 5 of 25
    dreyfus2dreyfus2 Posts: 1,071member


    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.

  • Reply 6 of 25

    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.

  • Reply 7 of 25
    tundraboytundraboy Posts: 1,624member
    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.
  • Reply 8 of 25
    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.
  • Reply 9 of 25
    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.
  • Reply 10 of 25
    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.
  • Reply 11 of 25
    jragostajragosta Posts: 10,473member
    sog35 wrote: »
    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.
  • Reply 12 of 25
    lkrupplkrupp Posts: 7,449member

    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.

  • Reply 13 of 25
    robin huberrobin huber Posts: 3,295member
    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.
  • Reply 14 of 25

    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).

  • Reply 15 of 25
    jragostajragosta Posts: 10,473member
    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.
  • Reply 16 of 25

    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.

  • Reply 17 of 25

    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".

  • Reply 18 of 25
    bwikbwik Posts: 562member
    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.
  • Reply 19 of 25
    SpamSandwichSpamSandwich Posts: 31,493member

    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.

  • Reply 20 of 25
    bwikbwik Posts: 562member
    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.
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