Wednesday, July 24, 2013

Apple's Buyback

Back in April of this year, Apple (AAPL) increased its share repurchase authorization to $ 60 billion.

Apple More Than Doubles Capital Return Program

Well, that naturally meant the company's fiscal 2013 third quarter financial results yesterday was going to be the first chance to see how aggressively it is being implemented.

It turns out they bought back $ 16 billion worth of their shares during the most recent quarter alone.

Quite a lot by just about any standard.

Under an earlier buyback authorization, they had bought back much less ($ 1.95 billion) during their fiscal first quarter (that ended on December 29th, 2012) but none in their fiscal second quarter.

Otherwise, meaningful buybacks really haven't been part of the Apple capital allocation plan (even as their free cash flow and cash on the balance sheet have been dramatically increasing over the past decade).

Even if there's less instant gratification, anyone who's invested in Apple for the longer haul should hope the share price continues to remain low as they carry out this repurchase program (and maybe even follow on programs). That way their cash gets more bang for the buck as they repurchase and the share count is reduced by a greater amount for a given amount of funds.

What matters, if the business needs are being appropriately funded and there's lots of financial strength, is that the shares are only repurchased when they sell at a nice discount to per share intrinsic value. As always, what's smart to buy at one price is rather less so at some price that's higher than what an asset is intrinsically worth. That, in just about any real world scenario, ends up being an approximate range of estimated value.

Since the value of any asset is always a necessarily imprecise thing to estimate -- and likely even more so for a business like Apple with the rapid changes that occur where it competes -- the discount should be a meaningful one.*

This $ 16 billion in repurchased shares was far in excess of quarterly free cash flow. Since Apple borrowed roughly $ 17 billion dollars during the quarter, as was announced a few months ago, that means the buyback was more than fully funded by their debt offering.

From here, without additional debt, any sizable buyback will have to be funded by their huge pile of cash (now $146.6 billion but after subtracting the debt they've taken on their net cash is more like $ 129.7 billion) or via free cash flow.

According to their latest reported results, this reduced average shares outstanding from 946 million at the end of the second quarter to just over 924 million in the current quarter. That roughly 22 million reduction in share count represents a 2.3% reduction.

Now, this is based upon the diluted weighted-average number of shares of common stock outstanding.

Yet, the end-of-quarter impact of the $ 16 billion in repurchased shares would clearly be greater than the weighted-average number would indicate.

In other words, it's not difficult to roughly calculate that the direct impact of the buyback on share count reduction -- based upon a reasonable assumption of average price paid -- would be greater than 22 million shares by quarter-end.**

The company also paid out roughly $ 2.8 billion in dividends during the most recent quarter.

So at least they're finally starting to do something material with all their cash.


Long position in AAPL established at much lower than recent prices

Related post:
Technology Stocks

* A more unpredictable range of possible outcomes requires a bigger margin of safety. In fact, sometimes no margin of safety is sufficient. As I have said before, there's really no technology business I'm comfortable with as a long-term investment. Most are involved in exciting, dynamic, and highly competitive industries. That's precisely what makes them unattractive long-term investments. For me, a very large discount is needed for them to be worth the trouble (i.e. an obvious and substantial mispricing) and positions remain on the small side. Otherwise, they're mostly just not worth the trouble. As always, I offer no view (and never will) on what's right for someone else. That's necessarily a unique thing. As a rule I believe no marketable stock should be purchased or sold based upon what someone else says (good or bad) about it. To me, that is a fundamental principle. Stocks should be bought or sold based on one's own sound analysis, conclusions, level of conviction, and within the limits of what the investor uniquely finds understandable. Satisfactory results aren't likely unless an investor is able to consistently and correctly judge the future prospects of a well understood business. Good outcomes aren't likely unless the investor can figure out what something is conservatively worth and always pays a nice discount to that estimate.
** For example, by dividing the $ 16 billion in buybacks by the average market price of AAPL during the quarter. Based on that the share count reduction directly attributable to the buyback would be much greater than 22 million. In fact, even if the shares were purchased at the highest quoted price during the quarter (not plausible, of course) the share count would be lessened by more than 34 million. This is offset, in part, by common stock that is issued under stock plans (employee shares issuances) over time, of course. The $ 16 billion was accomplished via both an accelerated share repurchase (ASR) program and repurchases in the open market. Apple entered into an ASR program with two different financial institutions to purchase as much as $12 billion of its common stock. The total number of shares repurchased (and the average price paid per share) won't be finalized until the program is settled up at the end of the purchase period (which goes beyond the quarter that just ended). Initially, 23.5 million shares were delivered to Apple and retired but that does not represent the final number of shares to be delivered and retired under the ASR program. The other $ 4 billion in repurchases was achieved via the open market. Apple repurchased and retired 9.0 million shares of its common stock in the open market at an average price of $446.74 per share for a total of $4 billion. A further explanation of this can be found under Note 6 in the latest 10-Q. The bottom line is that all of this buyback activity -- especially once the ASR is settled per contract -- will cause the shares outstanding impact to be greater than what's reflected in the weighted-average shares outstanding.
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