Apple (AAPL) has lost the excitement out in the investing community. Even with a record 4th quarter earnings of $13.81 that beat most estimates, the stock plunged around $60 per share, and the stock is down $250 from its high. Sure there is news that there wasn’t the amount of sales expected for many products, some due to material issues and others due to just lack of sales. But with a current PE of about 10.5, most would agree that Apple is as strong as ever. Here is one way I believe that Apple can generate more profits and excitement, An Apple share buyback program.
Let me highlight some very good reasons for an Apple share buyback. The biggest item I believe is that it shows the public that the company supports the stock. If announced on a sell off or a low point, it can show that the company believes the stock is cheap and it’s a great investment currently. Fewer shares will also increase the current shareholders value, increase EPS, increase the float %, and can save a dividend paying stock money. This is an investment in your company, if as a CEO you believe you are a better investment than anything else currently available.
There are also possible negatives to a stock buyback. First off, if you cut departments in your organization that could contribute to future growth. Amgen (AMGN) did this with their R&D department while buying back shares. I wrote an article on this last March:http://seekingalpha.com/article/418481-amgen-real-earnings-growth-or-just-a-mirage
Amgen also issued debt to buy back the shares as well. However, the stock has taken off after I wrote this article, from $67 a share then to around $86 today. They will be listed below in the positive examples. Other reasons to avoid a share buyback could be to buy competitors out, grow your existing business, buying shares when they are overpriced or issuing debt to buy back the shares. One other negative could be what some people call fake EPS growth, where the public believes that the company is growing, but in reality, they are not. However, I think this could be a positive for Apple.
Let me highlight a couple great examples of where the share buyback has been extremely positive for a company.
Amgen’s most recent major stock buyback happened late in 2011, where they bought back $5 billion in shares. This equated to about 83.3 million shares at $60 per share. They also had a $2 billion offering in 2011 and another one late in 2012. In this article from businessweek late last year, they stated that Amgen had bought back $9.5 billion in stock since October 2011, and had $500 million left to continue the purchase.
So let us do some simple math for Amgen. At October 2011, Amgen had around 932 million shares of stock outstanding. Today, they have around 767 million shares outstanding.
932 million – 767 million = 165 million shares purchased
$10 billion / 165 million = $60.61 per share
Seeing that Amgen is at $86 a share currently, it looks like a wise move.
Home Depot (HD) has also participated in a few share buybacks, and was quite aggressive in buying back shares in 2006, 2007, 2010 and 2011. Were these buybacks a solid investment?
In June 2007, Home Depot announced a $22.5 billion share repurchase, after selling their construction supply division for $10.3 billion. This was hoped to help a stock that was falling fast with the housing downturn. Later they decided to only buy back 289 million shares at $37 a share, which amounted to just over $10 billion.
However, Home Depot has continued towards that initial $22.5 billion in share repurchases, though in hindsight they missed great buying opportunities in 2008 and 2009. In 2010 and 2011, another 160 million shares came off the market, 2.5 billion in 2010 and with 3.5 billion allocated in 2011 to buy back shares. These shares would have all been repurchased at under $40 per share.
Today Home Depot is sitting close to an all-time high at $67 per share. They continue to buy back shares.
Apple currently has around $137 billion in free cash in reserve. Apple announced last March that they were going to start share buybacks of $10 billion, which is a drop in the bucket of at that time, $97.6 billion in cash. The reasoning for these buybacks was to offset stock issuing to employees. I believe it’s time for Apple to be extremely aggressive and buy back shares of their company as a significant discount. Apple currently has 939.06 million shares. Let’s say for example that Apple launches an aggressive $70 billion dollar share buyback. At $450 per share, that would equate to 155.55 million shares.
Let’s look at some numbers:
|Date ||Shares ||EPS ||Income |
|2012 ||939.21 million ||44.15 ||41.73 billion |
|2013(projected) ||939.06 million ||46.22 ||43.40 billion |
|2013(buyback) ||783.51 million ||55.39 ||43.40 billion |
|2014(projected) ||939.06 million ||53.35 ||50.10 billion |
|2014(buyback) ||783.51 million ||63.94 ||50.10 billion |
With this aggressive buyback, this would drive Apple’s forward PE to 8.1, and would also save the company $1.65 billion each year in dividend payments. The company would not have to take on any debt to do this, or cut spending on research, etc. Also on their current rate of acquiring cash, they would make this cash back in two years. This will also send a message to the public that Apple believes in themselves and the value of their stock and product.
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