What you need to know
- Above Avalon's Neil Cybart believes Apple will continue to increase authorization for buying back shares next week.
- He has set out detailed insight as to why Apple will increase its buyback authorization.
- He says that there is "likely no company in a better position than Apple to buy back shares during a pandemic."
Above Avalon's Neil Cybart has laid out detailed insight as to why he believes Apple will announce a $75 billion increase to buyback authorization next week.
The Above Avalon piece notes that since kicking off the program in 2013, Apple has spent a whopping $327 billion buying back over 2.5 billion shares, at an average price of $131.
This April, as is the case every year, Apple's board of directors will discuss share repurchasing and quarterly cash dividends, and Cybart believes that we can expect Apple to announce an increase to its buyback authorization of $75 million:
My expectation is for Apple's board to announce a $75 billion increase to buyback authorization next week. This would allow Apple to continue buying back shares at the same pace that it has for the past 24 months. Such an authorization would bring Apple's total repurchase authorization since 2012 to $460 billion. In order to add flexibility to such authorization, especially given the current environment, Apple will likely have more than 12 months to utilize the authorization. This means that if operating conditions continue to deteriorate over the next 12 months, Apple will have the ability to slow down its share buyback pace and run with a higher level of untapped repurchase authorization.
In his piece, Cybart lays out detailed insight into some criticism that's been aimed at companies who buyback shares. He notes airlines which are "aggressive share repurchasers" who now find themselves hemorrhaging cash and in-need of possible bailouts. Apple, he says, is a different story, however.
A very good argument can be made that Apple has become the poster child of responsible share repurchases. The company has relied on its stellar free cash flow to fund share repurchases over the years. Prior to U.S. tax reform and Apple keeping cash generating outside the U.S. in foreign subsidiaries, Apple issued debt at roughly the same pace as foreign cash generation. This resulted in Apple having $285 billion of cash, cash equivalents, and marketable securities on the balance sheet at the end of 1Q18. After two years of aggressive share repurchases, Apple's cash total is now closer to $200 billion.
By funding buyback with free cash flow, share repurchases have had zero impact on the amount of cash Apple wants to spend on organic growth initiatives including R&D, M&A, and capital expenditures. Apple is using truly excess cash that it has no use for to repurchase its shares.
Regarding the ongoing pandemic, Cybart notes that Apple's intrinsic value "which reflects Apple's cash flow generating capability in the future" has not changed due to the current economic climate. Rather he notes that "dislocations in credit markets have led to a renewed focus on liquidity and balance sheet preservation." He says that Apple has been willing to pause its share repurchasing if market trends call for it, but that on whole "there likely is no company in a better position than Apple to buy back shares during a pandemic.