Apple Inc. surprises with massive $17 billion Q4 stock buyback

Posted:
in AAPL Investors edited October 2014
During its fiscal Q4 ending in September, Apple spent an incredible $17 billion to buy up its own stock, increasingly doing so on its own without outside bankers' assistance. Since the beginning of fiscal 2014, Apple has spent an astounding $45 billion to repurchase its stock from fleeing investors at incredible discounts.

AAPL capital return by shares

A $17 billion windfall for AAPL investors

Apple's chief executive Tim Cook almost casually noted during the company's earnings call this week that Apple had spent another $17 billion on stock buybacks in the September quarter, over three times as much as it spent in either the previous June quarter or its year-ago September quarter.

"Our strong results continue to generate significant cash and we're extremely happy that this has enabled us to make substantial investments in Apple's future, while retaining -- while returning cash to our shareholders," Cook stated. "We had executed aggressively against our share repurchase program, spending $17 billion in the September quarter alone and $45 billion in the last year."

The unexpected windfall for shareholders is not only huge, but was also executed differently: rather than relying mostly on banking partners to execute an "Accelerated Share Repurchase" on its behalf, Apple performed almost half of the buybacks on its own, spending an all-time record $8 billion to buy back shares on the open market while issuing a smaller than usual $9 billion on its fourth ASR.

Curiously, Apple's massive quarterly buyback--involving at least three times the capital that the company is purportedly spending on its years long, massive Campus 2 construction project (below)--was all but ignored by the same members of the media who had earlier found it newsworthy that a large man from Canada could destroy an iPhone 6 Plus using only his hands.

Apple's unexpected stock buyback acceleration

Apple's stock is now hovering around an all time high, having appreciated 37 percent over just the past year. However, for half of the last twelve months (and throughout all of 2013), Apple shares have languished at prices from 60 to 75 percent of their current valuation.

Despite recent gains, Apple's current price is only 3 percent higher than it was two years ago at the launch of iPhone 5, even as the company continues to syphon off the majority of all profits in the PC, mobile phone and tablet markets with a series of blockbuster hits that have crushed struggling rivals' beleaguered efforts to follow its lead, from Microsoft's Surface to Google's Moto X to Amazon's Fire Phone and Samsung's Galaxy lineup.

AAPL vs Wall Street


Since initiating its buyback program two years ago, Apple has worked to aggressively use its capital to take advantage of irrational stock market valuations in what has turned out to be the largest stock repurchase program (setting multiple records both per quarter and in trailing twelve-month buyback activity) since the SEC enhanced the transparency of issue repurchases in 2005, and undoubtedly the most successful.

Some shareholders, including vocal activist investor Carl Icahn, have regularly opined that Apple should do even more to buy back its own shares, estimating that the company's appreciation over the last two years is just the beginning and that it is on a trajectory to again double in value in the near term.

"Apple remains dramatically undervalued," Icahn wrote in an 'open letter' to Apple's executive team, stating, "Our valuation analysis tells us that Apple should trade at $203 per share today, and we believe the disconnect between that price and today's price reflects and undervaluation anomaly that will soon disappear."

Apple's liberal spending on buybacks, and its increasing focus on open market purchases, indicates that the company agrees that its stock remains incredibly undervalued by investors.

Apple's 2014: the largest stock buyback, anywhere, ever

If there is any remaining doubt that Apple is greatly undervalued, that it has tremendous piles of cash and that the executive team of the world's most successful company collectively believes that the best investment of its cash is in itself, Apple has erased it with its fiscal 2014 buyback activity.

In the previous fiscal year 2013, Apple spent "just" $23 billion on buybacks, nearly half of what it spent over fiscal 2014. Over the course of both years, Apple's stock has languished at absurd lows after being derailed two years ago on concerns that its growth rate was slowing.

Cook first announced Apple's current dividend and share buyback plan in March 2012. At the time, Apple's share price was around $85 (split adjusted).


Beating stock manipulators at their own game

By the time Apple's buyback program began at the start of fiscal 2013 (beginning in September 2012), Apple's share price began to collapse. The company's shares continued to fall and remain low throughout 2013, dipping as low as $55. That provided Apple with the perfect conditions to buy up its own stock, using its capital to retire shares from the market--an action that concentrated the value of shareholders' stock and polished the company's fundamentals.

In its year-ago Q4 (ending September 2013), Apple "only" spent $5 billion on share buybacks, leading into the company's blockbuster holiday quarter. However, media coverage in January 2014 bizarrely described Apple's record Q1 as "disappointing," resulting in another collapse of the company's share price.

As Apple's stock plunged in value overnight from $78.50 to below $72 (and then continued there through the end of January 2014), the company's executive team took quick action to supercharge its share repurchase program, immediately spending $14 billion of its remaining buyback budget to snatch up its shares at a huge discount.

One week into February, Apple's chief executive Tim Cook revealed that Apple's executive team had jumped at the rare opportunity. The company later officially reported that it spent a total of $18 billion on stock buybacks in fiscal Q2, ending in March.

During the June quarter, Apple reported spending another $5 billion, directly buying back 58.7 million shares off the open market at an average price of $85.23. It appeared Apple would continue to buy back shares at the same $5 billion per quarter pace, as it had in 2013. Instead, Apple more than tripled its pace over the past quarter.

Accelerated share repurchase with less Accelerated Share Repurchase

Apple had historically used Accelerated Share Repurchase (ASR) to spend large amounts of capital rapidly on share buybacks. Under an ASR, a company buys its shares from an investment bank, which essentially shorts the stock by borrowing shares (typically from its clients) which it then delivers to the company for a fixed, upfront price.

Over the term of the ASR agreement, the investment bank then seeks to buy shares to replace those it has borrowed. Buying back shares via an ASR is usually more expensive because the bank wants to profit from the transaction. However, the slight price premium allows the company to spend a fixed amount of money rapidly and immediately reduce its outstanding share count.

While Apple fronted the money right away and retired the initial proceeds of borrowed stock, the company's banking partner continued to buy back shares over the year-long term of the agreements. This quarter, Apple issued its fourth ASR at "just" $9 billion, a steep drop from its previous $12 billion ASRs. At the same time, the company shifted its typical $5 to $6 billion open market buybacks into an $8 billion spend, a move that appears aimed at getting the best price without paying bankers for their help.

Apple has $36 billion remaining in its currently articulated capital return program. Apple's chief financial officer Luca Maestri reiterated during the Q4 conference call this week that "we review our capital allocation regularly. We have solicited feedback on our capital return program from shareholders in the past and we will continue to do so. We plan to report on our conclusions in a timeframe similar to last year."
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Comments

  • Reply 1 of 53
    In surprised Apple is not being investigated for that, if for no reason other than, [I]because[/I]
  • Reply 2 of 53

    $17B for one quarter for one company is a stunning figure -- that's probably close to one-seventh of the entire value of share buybacks by US companies last quarter.

     

    I hope Apple loaded upon its own shares last week as well. (I did, with whatever cash I could spare.)

  • Reply 3 of 53

    Experts say to 'study success,' then emulate its formula. Using this model, maybe GT Technologies people should buy up as much stock as they can while it is low & then...well, then....then, they'd really have something! Especially so, if Apple took it over & ran it successfully for a huge profit & share gains.

  • Reply 4 of 53
    Quote:
    Originally Posted by Suddenly Newton View Post



    In surprised Apple is not being investigated for that, if for no reason other than, because



    "Members of Congress, the NSA, the FBI and the New York Stock exchange all swarmed Apple's headquarters today demanding answers...and a free iPhone 6."

  • Reply 5 of 53
    Quote:

    Originally Posted by kellya74u View Post

     

    Experts say to 'study success,' then emulate its formula. Using this model, maybe GT Technologies people should buy up as much stock as they can while it is low & then...well, then....then, they'd really have something! Especially so, if Apple took it over & ran it successfully for a huge profit & share gains.




    GTAT has been withdrawn from transactions if i'm not mistaken.

  • Reply 6 of 53
    dasanman69dasanman69 Posts: 13,001member
    "Members of Congress, the NSA, the FBI and the New York Stock exchange all swarmed Apple's headquarters today demanding answers...and a free iPhone 6."

    C'mon who's going to believe that? If you're going to demand a free iPhone you're going to go for the 6+.
  • Reply 7 of 53
    MacProMacPro Posts: 19,428member
    dasanman69 wrote: »
    C'mon who's going to believe that? If you're going to demand a free iPhone you're going to go for the 6+.

    LOL

    I must say that $203 mark is something I look forward to. My initial gamble in AAPL will be well into a 7 figure return, at about half way there.
  • Reply 8 of 53
    dasanman69dasanman69 Posts: 13,001member
    LOL

    I must say that $203 mark is something I look forward to. My initial gamble in AAPL will be well into a 7 figure return, at about half way there.

    Then you can change your username to moneyclips. :lol:
  • Reply 9 of 53
    MacProMacPro Posts: 19,428member
    dasanman69 wrote: »
    Then you can change your username to moneyclips. :lol:

    haha you are on good form tonight. :D
  • Reply 10 of 53
    radarthekatradarthekat Posts: 3,403moderator
    LOL

    I must say that $203 mark is something I look forward to. My initial gamble in AAPL will be well into a 7 figure return, at about half way there.

    Half way there? Is that a 3-figure return or a 4-figure return at this point? /JK

    I'm right there with you. Sitting on a couple hundred $k of unrealized gains on 7k shares. If we ever see $203/share, that would add another $700k to my account balance. Not to mention the calls and debit call spreads I'm holding. Icahn was talking his own book, but in two years I could see the stock touching $150.

    700
  • Reply 11 of 53
    dasanman69dasanman69 Posts: 13,001member
    haha you are on good form tonight. :D

    Thanks. I have my moments. ;)
  • Reply 12 of 53
    Can anyone tell me why this stock buyback is better for investors than a dividend increase?
  • Reply 13 of 53
    Quote:
    Originally Posted by ArtDent View Post



    Can anyone tell me why this stock buyback is better for investors than a dividend increase?



    You say potato, I say potato.

     

    Say apple as a whole is worth 100 ... and there are 100 shares outstanding... each share is worth 1.

    Now apple buys back 50 of those outstanding shares ... everyone that still holds now has shares worth 2 without anything about the company changing.

     

    So you still have increased your net worth... just in share value rather than in a dividend payout.

     

    You could spend all day crunching numbers and say one is better than the other, but in the broader view, they're the same thing... except that the buyback gives Apple a bit more control over itself, as there are now fewer "shareholders" that it has to answer to (but that would be considered an INtangible benefit and not really quantifiable).

     

    (The day an investor like Ichan gets their hands on 50%+1 of outstanding shares is the day Apple is truly "doomed". ;) )

  • Reply 14 of 53
    Quote:

    Originally Posted by ArtDent View Post



    Can anyone tell me why this stock buyback is better for investors than a dividend increase?

    It's not always the case that repurchases are better than dividends, but it's often the case.

     

    1) Repurchases do not have the de facto permanence of dividends: once put in place, withdrawal -- or even lowering -- of dividends sends a terrible signal to the market. Stock price consequences can be devastating. Companies think long and hard before initiating dividends. Repurchases -- even announced repurchase programs -- can be easily reversed.

     

    2) Dividends necessarily involve all shareholders -- i.e., you do not have a choice except to accept the money that is returned to you. However, you do not have to sell your shares back to Apple if you believe that the long term share prospects are even better. The shareholder has the option to take the cash or not, in other words.

     

    3) Repurchases can be more tax advantageous compared to dividends. You necessarily have to pay taxes on dividends at the current rate. But with repurchases, you can decide which lots to sell, and thus manage your taxes better.

     

    4) Repurchases can send a huge positive signal to markets. They tell the market that the management not only thinks its own stock is undervalued, but is willing to put its money where its mouth is. I.e., it is treated as a very credible signal of undervaluation.

     

    5) (This one is not particularly relevant to Apple). There is a 'clientele effect' with dividends. Once initiated, it attracts a completely new type of investor -- the 'income', as opposed to a 'growth' investor. So, for reasons of managing its clientele, a company may decide to return money to shareholders via repurchases rather than dividends.

     

    6) (Again, may not be a huge one for Apple, but is perhaps a factor). Companies often like to actively manage their capital structure -- i.e., manage their debt-equity ratios. Repurchasing shares by taking on debt is an excellent way to do that. In Apple's case, taking on debt also gives it a huge tax benefit: it does not have to bring the money parked abroad (on which it'll have to pay 35% in taxes to US government) to repurchase shares, but can use debt to do so instead.

     

    (There is, however, a totally lame/bogus argument often made for repurchases, which goes as follows: that you can increase EPS by lowering the 'S'. Don't buy it.)

  • Reply 15 of 53
    MacProMacPro Posts: 19,428member
    Half way there? Is that a 3-figure return or a 4-figure return at this point? /JK

    I'm right there with you. Sitting on a couple hundred $k of unrealized gains on 7k shares. If we ever see $203/share, that would add another $700k to my account balance. Not to mention the calls and debit call spreads I'm holding. Icahn was talking his own book, but in two years I could see the stock touching $150.

    700

    Well we bought in several tranches but the major buy in was at $70 pre split so those are 10X. I had bought a nice chunk at $30 pre split and we added at $200 pre split.

    By 'half way' I mean at $150 a share, i.e. half way from now to $203 roughly. Once we pass $150 it's 7 figures over all :). We were not brave enough to go all in but it is one hell of a return. We intend to leave it all untouched and have all dividends reinvested. Once at $200 I might believe it and cash a few in. :D

    Is it just me but all my Macs seem to have typing delay on AI in the last few days.
  • Reply 16 of 53
    Quote:

    Originally Posted by digitalclips View Post





    ...Is it just me but all my Macs seem to have typing delay on AI in the last few days.

     

    The mobile version of the site has quite a few problems of late.

  • Reply 17 of 53
    So no 'mad' money spending... I donno... Like buy Comcast? That sure would shake some things (and people) up.
  • Reply 18 of 53
    robmrobm Posts: 1,068member
    the
    boeyc15 wrote: »
    So no 'mad' money spending... I donno... Like buy Comcast? That sure would shake some things (and people) up.

    No offense meant to you boeyc, but you did say the C word :-)
    Comcast, ugh. Heck the dead wood they're carrying is scary.
    If ever a tree needed felling its that one before it falls and kills innocent bystanders.
    Not Apples job to restructure. Apple could offer Comcast a lifeline but why bother.

    To stay with the forest analogy - Comcast will eventually topple over with too much weight up top. Unless it wakes up.
    Outside of the U.S. even massive Sky is slowly teetering under its own weight and self importance.
  • Reply 19 of 53
    "(There is, however, a totally lame/bogus argument often made for repurchases, which goes as follows: that you can increase EPS by lowering the 'S'. Don't buy it.)"

    When you are looking at diluted e/ps, this is usually the case. Apple is different in that their stock repurchase program relative to their employee option program and their own market cap is so significant that it does in fact increase e/ps in a meaningful and substantive way.
  • Reply 20 of 53
    MarvinMarvin Posts: 14,621moderator
    In surprised Apple is not being investigated for that, if for no reason other than, because

    They committed to this buyback, they said $90b before December in one of their SEC filings and they'd only done $51b so they were $39b short of the goal. They are now still $22b short so the next earnings report could very well show an even higher buyback, which needs to be executed next month. People should try to drive the stock down in order to allow Apple to buy more back with the $22b. They'll buy it back regardless but remaining shareholders will get more value if it goes down.
    artdent wrote:
    Can anyone tell me why this stock buyback is better for investors than a dividend increase?

    Apple is taking shares off the table so they are essentially just dissolving cash into nothing but giving the shareholders who sell a payout. This reduces Apple's cash but it reduces the shares so while it shouldn't do anything if their cash was being accounted for in their valuation, it does eventually help push the stock price up and it creates upwards momentum. One positive message it sends is that they make so much money, they can pretty much dissolve it and not care.

    A payout of the cash directly would be better to some people but you may have the option. Say that you owned $100k out of $600b and they just paid out the cash to shareholders then you'd get ~$2800, no change in stock price. If they take 2.8% shares off the table, your holding should eventually rise by similar amounts but momentum, tax savings etc can make it a better option. You only see those gains when you sell but you have that choice. The possible downside is if the share price doesn't rise because then the buyback would be worthless to remaining shareholders.
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