Friday, October 25, 2013

A Bigger Buyback For Apple?

Earlier this year, Apple (AAPL) expanded its share repurchase authorization to $ 60 billion.

Well, Carl Icahn is calling on the company to repurchase more like $ 150 billion in stock. From this recent Icahn letter to Tim Cook:

"We want to be very clear that we could not be more supportive of you, the existing management team, the culture at Apple and the innovative spirit it engenders. The criticism we have as shareholders has nothing to do with your management leadership or operational strategy. Our criticism relates to one thing only: the size and timeframe of Apple's buyback program. It is obvious to us that it should be much bigger and immediate."

Warren Buffett did recently say "I wish I had bought the stock many years ago" and also mentioned he had advised Apple on buying back their stock -- if they thought it to be undervalued -- a few years ago or so.
(At that time they did not.)

Buffett is no small fan of buybacks when they make sense yet said the following about the pressure on Apple to buyback even more of their stock than they are already doing:

"I think the Apple management and directors have done a pretty darn good job of running the company. My vote would be with them."

He then added this:

"I do not think that companies should be run primarily to please Wall Street and largely shareholders who are going to sell. I believe in running Berkshire for the shareholders who are going to stay and not the one's who are going to leave."

So they agree on how well the company is being run.

The important difference comes down to time horizon.

Buffett has always had a strong bias in favor of building and serving a base of shareholders who mostly are going to stick around for the long haul. With that in mind, he naturally has a preference that decisions are made, first and foremost, for long term owners. He's just not that enthusiastic about responding to pressure from someone who might not be around as a part owner for very long.

Pressure for change from those who intend to own shares for years to come -- under the right circumstances -- can be just fine; pressure from those with shorter time horizons is not.

So those who push for action to achieve a profitable near term outcome then move onto the next target should be considered of secondary importance to those in it for the long haul.
(What moves the stock up near-term may or may not also be favorable for long term owners.)

Still, what Carl Icahn usually does is hardly the equivalent of short term trading.

Agitating for fundamental change at the senior management and board level can be a very useful thing. No doubt more than a few companies need it. In fact, the investing world would benefit from more large shareholders who are willing to do so and are competent at it. The question is whether those who push for the change are willing -- alongside other owners -- to stick around for the long run repercussions of the change they helped facilitate.

Some will no doubt argue that the sticking around part isn't all that important as long as the right kind of change happens.*

Icahn wants Apple's board to move more aggressively and announce a $150 billion tender offer. He thinks it should be financed with debt or a mix of debt and balance sheet cash.

In the letter, Icahn does say "to invalidate any possible criticism that I would not stand by this thesis in terms of its long term benefit to shareholders, I hereby agree to withhold my shares from the proposed $150 Billion tender offer. There is nothing short term about my intentions here."

Of course, that definition of long term -- a willingness to withhold shares during the tender offer -- probably isn't exactly a time horizon that Buffett would consider long term.

Now, if someone like Carl Icahn can actually improve corporate governance more generally (and maybe improve/change the laws of consequence that can undermine long term oriented owners) that would be a very useful thing.

The quarterly results Apple released back in July revealed they've already been buying back a whole lot of stock. The company was also likely doing so, in a meaningful way, during the quarter that just ended.

One of Icahn's chief concerns seems to be that the window to buyback the stock when it is actually cheap will close sooner than later. That's certainly a legit concern. Now, the existing $ 60 billion buyback authorization is not exactly small but, the question is, how fast can it be executed. The company indicated back in April it expects the buyback to be completed by the end of 2015.

Well, if the buyback takes all of that time to complete and the stock price rises materially, it just won't be as effective as it could otherwise be. It may still have a favorable impact, of course, but a bit less so than if it were completed while the stock was selling for much less.**

It's also possible that the stock becomes truly expensive. In that case the buyback should naturally be halted. Buybacks generally only make sense when the share price represents a plain discount to per share intrinsic value, the company is comfortably financed, no superior alternative investment(s) exist, and all other important expenditures (including whatever solidifies/widens the moat) are covered.

Apple reports its quarterly results next week. At that time, it will become more clear just how much more stock they've been buying since they last reported.

The buyback activity may not be quite as much as some would like to see, but they still likely repurchased more than a few shares outstanding.

In any case, I'll still never really be all that comfortable with tech stocks as long-term investments.

They have, on occasion, become of mild interest (in small doses) when selling at a substantial discount to conservatively estimated per share intrinsic value.

That's about it.


Long position in AAPL established at much lower than recent prices

Related posts:
Apple's Buyback
Technology Stocks

* The following seems relevant here. Does the owner of an asset (e.g. a car), someone who intends to sell sooner than later, spend money on the things that will assure reliable performance many years from now or, instead, mostly just do those things that polish it up for sale? Time horizon impacts owner behavior. This naturally also applies to businesses. Crucial things must be often be done today to make sure a business remains competitive many years down the road. Those who are mostly (if not entirely) trying to get a near term result aren't likely to weigh those important long term considerations appropriately against their own near term objectives and interests. Sometimes there's no tension between near term and long term considerations; other times there is.
** One wonders how much of the recent rally in the stock can be attributed to Icahn's actions. In other words, how much has the higher than otherwise price inadvertently reduced Apple's buyback effectiveness. That may not be precisely knowable but it certainly matters. Around the more recent market prices, the buyback is already meaningfully less impactful than it would have been not long ago.
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