Share Buybacks Make Apple Sweeter
Some interesting comments on the blog of late debating the merits of buying stocks with dividends versus not. I don't have a problem buying stocks without dividends since many stocks I focus on are relatively young and in high growth states. In markets like this they are punished since the growth is questioned; but if they have "must have" products or are in highly defensible niches that fear is usually very overblown.
The other issue is many companies don't like to issue dividends even if they can (see Microsoft for a long time) because it means they've turned from a growth stock to a value stock. So more important than actually spitting off dividends is the ABILITY to spit off dividends (i.e. high cash on balance sheet and positive cash flow).
Stock buybacks have interestingly meant almost nothing in this horrid market - usually this has 
proven to be a great defense, but the selloff is so relentless, stocks with buybacks are punished just the same as those without. But in this respite in the market, Apple (AAPL) is surging on reports they might finally deploy their $25 billion war chest. This company is a splendid cash cow as the chart shows. Right now about 1/3rd of its market value is cash.
- Apple is sitting on a huge cash reserve — $24.5 billion as of September and growing at the rate of $8 to $10 billion a year – that’s doing almost nothing for it.
- The money is earning about $1.55% interest after taxes, according to a report issued Wednesday by Bernstein Research’s Toni Sacconaghi, at a time when the company’s stock is trading at a unusually low (for Apple) multiple of 15 times earnings.
- “Mathematically,” he wrote “share buybacks boost EPS only if a stock’s P/E multiple is lower than the reciprocal of the after-tax interest rate earned on cash.”
- Apple has been trading at 30 to 40 times earnings in recent years, which Sacconaghi believes is one reason Apple has not initiated a stock repurchase program in the past 5 years.
- But today, according to Sacconaghi’s model, Apple is trading at about 18 times his fiscal year 2009 earnings estimate (and about 13 times earnings using non-GAAP numbers).
- Ten billion dollars spent purchasing Apple shares,he estimates, would boost the company’s [GAAP] EPS about 4%. A $20 billion buyback program would boost it about 9%. And if the $20 billion program were front-loaded — completed in the first fiscal quarter of 2009 — the company’s EPS could jump as much as 15% (or $0.75 a share).
- According to Sacconaghi, better than the alternatives: making a major acquisition, paying a substantial dividend or continuing to let its cash horde grow
- A big dividend — say, 5% — would consume only about half Apple’s cash flow, and a special dividend would dilute Apple’s earnings growth too much to please shareholders.
Some combination of a dividend and buyback would be nice, but again this is an analyst speculation - nothing else.
Disclosure: Long Apple in fund; no personal position
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This article has 25 comments:
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disposableidentity
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7 Comments
Oct 30 09:23 AMAt this share price (about $90-$110) it must seem tempting. But look at it another way. With the iPhone Apple grew their revenue by about 50% over last year, and grew their earnings by a whopping 75%. That's with good old Apple ingenuity and smart product offerings that radically shake up the markets they enter. Now we're supposed to believe that spending $20 billion to boost earnings per share about 9% is a good bargain?
I say let them hold on to the cash and use it to enter, and change another whole industry (television? VOIP? who knows?).
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.crazylegs..
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125 Comments
Oct 30 10:09 AM-
chano
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30 Comments
Oct 30 10:13 AMWhy even taint your reputation by quoting that infamous MS shill Sacconaghi? Do you care about your reputation at all?
Stick to peeling potatoes. That is your level.
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iJah420
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26 Comments
Oct 30 10:19 AMNo DOUBT! Keep the cash for a rainy day. Especially in this type of economy and market.
Why is it that these ANAL ist's think that "THEY KNOW" whats best for AAPL.
The shorts & hedges want a buyback so they can manipulate the stock.
Screw them. Apple has a plan and it is a long term plan. That plan does not include day traders. Apple will be @ $250 in @ least 3 years just you watch. laugh ALL you want...... these are the same skeptics that said the iPod was a joke. same goes for iPhone.
ijah420 says !@#$ the ANAL ist's they don' know !@!@#$!!!
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bobthenoob
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42 Comments
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Oct 30 10:21 AM-
Kevin_S
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20 Comments
Oct 30 10:54 AM-
offtheobt
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7 Comments
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Oct 30 11:13 AM-
Bastion
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15 Comments
Oct 30 11:23 AMApple is NOT in business to please day traders and investment bankers!
Apple shareholders know that if Apple uses its "war chest" (why must everything devolve to military and combative cliches?) to invest in R&D that it will blow the doors off the market, while its competitors are marking time, drowning in debt and suffering from lower revenues during the downturn - and NOT able to significantly invest in R&D.
That's what I want to see. That's what has lasting shareholder value. That's what makes an even bigger "war chest" and makes big dividends and buy-backs even more plausible when the economy turns around.
Apple, do the right thing and don't cave to these short-sighted talking heads!
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Bonemesly
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4 Comments
Oct 30 11:38 AM-
kris23
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90 Comments
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Oct 30 12:48 PM-
terder
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4 Comments
Oct 30 01:40 PM2) For that matter, what does stock price have to do with Apple products ? I'm fairly certain they're equally competent to produce whether at $1 or $1000. You think they give a rip how high it can go like Google ?
3) It would seem that at the moment holding CASH is a better proposition than most kinds of investments.
4) Cash is good for buying things. RIMM's Mkt Cap is about 25-26 mil.
5) Wouldn't a war chest be used in times of battle ? Is there some threat Apple is facing we're not aware of that would require them to tap it ?
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zoooomer
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7 Comments
Oct 30 01:42 PM-
waf76
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63 Comments
Oct 30 02:14 PM-
iPsycho
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53 Comments
Oct 30 02:15 PMIt is commonly thought by all Apple longs that this Sacconaghi fellow is a joke. Why would Steve Jobs listen to this guy?
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Rich in Palo Alto
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4 Comments
Oct 30 02:17 PMApple could do a far better job of marketing Sat Radio and become a national broadcast media company getting monthly fees from their loyal customers. They are already a record company, get into national broadcast as well.
In addition to an upgrade cycle for iPod customers - they could also have iPods for Autos - again generating monthly fees and iPod Auto video in Auto entertainment systems, and great integration of iPhones into Auto audio/telephone & Navigation.
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Leofox
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30 Comments
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Oct 30 04:09 PMwww.dhantube.com/
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Leofox
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30 Comments
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Oct 30 04:09 PMwww.dhantube.com/
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Grouch
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6 Comments
Oct 30 07:20 PMYo, Bernstein Research’s Toni Sacconaghi do we just take your word for it with these off the wall projections or will you show us your figures so we can confirm how inept you are?
Cash is king now and any analyst who even suggests that a company should get rid of a large amount of its cash is totally incompetent (or, in your case, probably just trying another Apple price manipulation -- downward in your case if they don't see the "wisdom" of your suggestion. You are the advance man of another "analyst" round of Apple price "fixing.")
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beech_35
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16 Comments
Oct 30 10:00 PM-
peapack@verizon.net
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2 Comments
Oct 31 09:10 AMSteve Jobs and company are one of the greatest teams of recent decades-look at their results. I also own the stock because of that cash-I have faith that they will use it well.
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Andy Singh
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49 Comments
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Oct 31 10:39 AM-
mollytjm
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322 Comments
Oct 31 11:26 AMI'm a stockholder...i do not want Apple to buy back stock. Keep the crown jewels in the tower, the drawbridge up and the moat filled!!!
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jvi
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11 Comments
Oct 31 09:02 PM-
NotVerySmart2
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87 Comments
Nov 01 11:42 AMOverview
I know many folks come on these boards claiming wildly higher prices with no justification other than plain speculation. I want to be clear that I will make some claims here that will seem incredulous, however I will humbly submit that I’ve done hours of homework and intend to justify my position with clear technical analysis. As a (mostly) technical trader (I prefer options), I make no real fundamental claims as to why these projections will be realized (I’ll leave that to others here), I only track the price action and momentum believing that the market will find ways to justify the inevitable outcome (e.g. “Good stocks find reasons to go higher, bad stocks find reasons to go lower”). I’ll also state that you should invest at your own risk and to make your own decisions as to how much risk you can afford. My final disclosure is that I am (very) long APPL calls (option positions set for positive price movement) and have a very bullish sentiment on this stock. With that aside, here is my opinion of APPL in the upcoming months.
Company Overview
Apple is a unique equity opportunity as the company has a significant cash reserve and consistent growth with a dedicated following in the consumer base. The beta being 2.62 implies that it’s volatility to market conditions is very high and thus it reacts to the overall market price movement in an exponential fashion. The market having recently bottomed (IMHO October 10th), is now looking for upward price momentum opportunities to recoup losses taken in the recent decline. Apple having a stable war-chest of cash and significant growth (26% this Q) presents a stable growth opportunity for investors in a market that has been relatively unstable. Apple (IMHO) also has a rather “cultish” following of investors as many high-net worth individuals can identify with the company and its ability to package and deliver products to market with such quality that they justify a premium price. Additionally, the recent release of the iPhone (IMHO) completely changes the landscape of mobile computing. With other companies releasing smaller cheaper notebooks (e.g. “Netbooks”) to offer a lower price point for consumers, they fail to realize that Apple offers the same capabilities (and a cell phone) for less than $200. I feel this revolution in mobile computing will be realized over the next year and then used for justification as to why the stock moved higher (for all you fundamentalists out there). Overall Apple is a very stable company with considerable cash-flows, and a significant cash reserve. This offers both immediate stability during uncertainty and the possibility of heavy growth in future earnings.
The Technical Analysis
The old saying “history repeats itself” is a mantra for technical traders. We analyze historical price movements and the technical indicators the preclude them. We then use this data to attempt to predict future price action to (hopefully) gain returns on our investments. It is clear to me that Apple is repeating a pattern seen during the last earnings season (please review AAPL from 01/08 – 05/08). The stock seems to dip significantly prior to earnings, then recover to about 85% of its prior value on the (mostly) good earnings news. Although the long term momentum is downward (consistent reduction in highs and lows forming a long term bearish triangle), the recent short term decline presents an opportunity for significant profits. We are currently at the bottom side of Apples rhythmic price action. The Fibonacci retrace indicates that the real bottom was $95 (I realize there were some short term deviations, this is insignificant noise in found in daily “panic” trading). The stock found support at this base ($95) forming a “swing point” during most of October 2008. We saw lows of $85, where critical historical resistance held up like a brick wall and highs of $110 where short term traders took profits. The recent trading range (up to earnings) established a “Bullish Triangle Reversal” pattern (minus low volume) that was simply awaiting a “breakout”. The short term low trending line (marking decreases in price movement) that started in early October was broken last week on October 28th 2008 (please refer to your charts). Although I realize this mimics a pre-earnings break out seen on October 13th, I would humbly submit that the 10/13 basing was a reaction to support levels ($85), and did not share the benefit of earnings growth confirmation. The recent rise in pricing is much different as the price has risen quite steadily (over several days) on positive volume rather than a sharp increase, then sharp decline where many traders find short term profits. The other significant difference of this recent increase is that the volatility index is reducing (rather than increasing) meaning that the price action of the stock is beginning to return to “actual” value. From October 10th to October 27th Apple was forming a triangular pattern derived from drawing a line (get a crayon) along the lows and another line along the highs. The significance of this pattern is that it indicates that investors are increasingly undecided as it swings above and below its mean value (IMHO $95). On October 28th Apple broke out of this reducing “swing pattern” at $104 and immediately rose to $112. In Technical Analysis we call this “breakout confirmation”. This fast increase in price movement combined with the bullish triangle formation and the historical price movement of 01/2008 – 05/2008, offers strong confirmation of future price action. The stock is returning to its long term mean of $125 bringing new highs in the $150 to $160 range over the next few months. Secondary confirmation of the mean can be seen on September 19th-29th as the stock found support in the $120-$130 range. Other technical indicators like the MACD, the Aroon, the RSI, the Money Flow, and the Stochastics offer strong proof that Apple has based, that the moving averages are moving upward, and that money flow is moving back into the stock. These signals combined with the recent break out lead me to offer the following predictions:
Apple Pricing Predictions:
11/15/2008 - 12/01/2008 - $122
12/15/2008 - 01/01/2009 - $150
Near Term Outlook
My feeling is that after these targets are reached, the stock will then stabilize for a few months and either resume its long term downward pattern or breakout of the pattern to find new highs. I will require more information and price action to make this determination. What is clear however is that at the current price of $107 the stock is significantly undervalued. I do see that some short term weakness (like Friday) may offer an entry point between $100 -$105, however I also see indications that the price movement Friday offered stability (a foothold) and that by Wednesday of next week we will be moving steadily higher.
The Hopeful Investor
My final commentary is that many investors that love this stock wait on the sidelines hoping for lower prices. I’m sure many of them will chime in and respond to this post negatively hoping to convince you otherwise. I would respectfully tell them that hope is not an investment strategy and that waiting for absolute lows (and highs) is sheer folly. As a Technical Investor you look to take advantage of 80% of the price action, risking 20% to short term volatility. These “hopeful investors” are the same folks that drive up the price dramatically as they panic to get in on the highs of the day and get burned by panicking and selling on the lows. Feeling disgruntled by their losses they come on these boards and trash the stock, then panic and buy in once the movement has already happened. They do eventually make money, but their short term lack of vision costs them 30% - 40% of what could have been made simply by trusting the technical indicators and ignoring the noise of short term movement. I can tell you this with full conscience as there was a time when I too was a “Hopeful Investor”. I have since learned (over 11 years) to trust what the indicators are saying, have faith in my decisions made calmly with the analysis, and not to be affected by the “drama” of daily movement.
Finally, the Conclusion
The technical signs are clear here folks. The stock is moving upward. I sincerely hope the data I have offered makes sense. I will be checking this post from time to time to answer any questions. I wish everyone the best of luck and hope you all take advantage of this opportunity to make money.
Take care,
NVS
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Philip Elmer-DeWitt
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1 Comment
My Website
Nov 03 09:42 PMapple20.blogs.fortune..../
Although there is an internal link to Apple 2.0, the material is presented as if it were written by Trader Mark.