In 2 years, Apple could buy 18% of its own market cap

In 3 years, under the new repatriation rules, Apple will have freed up enough cash to reduce its share count by 25%.

From a note to clients by UBS analyst Steve Milunovich that landed in my inbox Tuesday:

Annual repurchase rate of 4% of shares could go to at least 7%, in our view Apple clearly is a beneficiary of overseas cash repatriation. We assess the potential magnitude and find that repatriation could free up an incremental $25bn. Including regular FCF, we figure there could be $122bn available over a two year period or 14% of the market cap while maintaining a net cash position of $90bn. Our analysis is based on an estimate of a post-repatriation target capital structure that has been fairly consistent the last five years. Apple has been buying about 5% of the company per year. Repatriation increases the rate, which should be helpful as investors ask what’s next.

Apple’s target capital structure determines repurchase rate We assume that Apple has been targeting a net cash position as if its foreign cash were brought back at a 25% rate, which is the statutory rate less foreign tax credits of ~10%. This implies Apple has been targeting a $90-100bn net cash position over the past several years (Figure 2). Repatriation at 15.5% frees up some $24bn assuming net cash remains at $90bn. Combined with regular annual FCF seen at ~$60bn, we estimate Apple could spend perhaps $122bn on buybacks through 2019 and still maintain this $90bn net cash position. However, if Apple targets a lower net cash figure, say $60bn, the percentage of outstanding repurchased over two years might rise from 14% to 18%.

repatriation

Click to enlarge.

My take: Apple doesn’t have that much choice. Trump’s tax code, I’m told, requires companies to repatriate overseas profits.

6 Comments

  1. Fred Stein said:

    I’ve been touting the importance of buybacks for years. No other stock has such an insurance policy. This tempts an extreme (embarrassing) claim that AAPL is bullet proof… at current prices.

    Betting on that thesis, I’ve sold a fair number of naked puts over the last few years. Despite a scare two years ago, it’s worked out. Even in a global crisis, AAPl has a floor, due to the aforementioned insurance.

    Services, as well, provides insurance. Again, in crisis, folks may not buy new phones, but will buy services.

    1
    January 9, 2018
  2. Robert Paul Leitao said:

    In five years through the end of FY2017, Apple reduced the fully diluted share count by roughly 22%. As of the end of FY2017, which closed in late September, there was $44 billion remaining for repurchases under the current $210 billion share repurchase program. At today’s closing price, deploying the remaining $44 billion in already authorized repurchases would reduce the fully diluted share count by about 4.8%. That’s before consideration of the impact of a greatly expanded repurchase program with repatriated foreign-sourced earnings at the significantly reduced tax rate. In other words, by the time the currently authorized repurchases are completed, the fully diluted share count will have already been reduced by about 25% from the peak in FQ4 2012.

    Additional repurchases with repatriated funds will not only further reduce the fully diluted share count, the lower the share count the more Apple can pay out in dividends per remaining share. Consequently, long-term shareholders will benefit in two ways – higher earnings per share as the share count continues to be reduced and higher dividends per share as earnings continue to rise.

    The reduction in tax rates applies not only to repatriated foreign-sourced earnings, but to all earnings the company now creates. The savings on taxes will boost net income on an ongoing basis and provide additional capital to be returned to shareholders in the form of higher dividends per share on a dwindling number of shares outstanding.

    What other publicly-traded enterprise on the planet has the ability to reward long-term shareholders so well on an ongoing, consistent and regular basis?

    2
    January 10, 2018
    • David Drinkwater said:

      These are all very fair points, RPL, but what of the fact that Apple continues to finance repurchases with very low interest debt? Someday, the “cash” has to go somewhere!

      (I believe that my investment time horizon is long enough, but I do also believe that weighs on share price today, ironically.)

      0
      January 10, 2018

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