If Apple spends $100 billion on a buyback, the stock does what?

Friend-of-the-blog Jeff F offers back-of-the-envelope estimates for buybacks of $100, $200 and $300 billion.

If Apple is serious about returning 100% of its repatriated cash to shareholders—"the biggest asset transfer from an enterprise to its shareholders in history," as Braeburn's Robert Paul Leitao puts it—the stock will necessarily rise.

But by how much?

That depends to some extent on Apple's Q2 results and the guidance it offers for Q3. But all things being equal, (assuming a P/E of 16 and a starting price of $165), Jeff F estimates that...

If Apple spends $100 billion, the share price goes to $211 without changes in the P/E ratio.
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If Apple spends $200 billion, the share price goes to $244 without changes in the P/E ratio.
Buybacks
If Apple spends $300 billion,* the share price goes to $290 without changes in the P/E ratio.buybacks
*$300 billion is not as over-the-top as it may seem. That's what Apple's $150+ billion net cash grows to in three years if its free cash continues to flow at the rate of $50 billion a year.

Jeff F's take: Some could argue that the current P/E of 16 already considers a part of Apple’s cash. But we know that prices increase when there are more buyers than sellers, and $100B is a lot of demand for outstanding shares.  P/E contraction will mitigate the share price amounts above; how much depends on Wall Street's sentiment for Apple’s future growth prospects. Currently the Street sees Apple's runway in dimensions suitable for a helicopter.

9 Comments

  1. Gregg Thurman said:
    Until WS calculates Apple’s value the same way it calculates Amazon, Microsoft, Google, Netflix or Facebook, I’ll wager that AAPL’s multiple will contract.

    In support of that argument I’d cite multiples from 6 years ago, before 24% iPhone ASP growth of 24%, before Apple Music, before Apple Watch, before HomePod, before buybacks, before dividends, before 12% average annual revenue growth throwing 22.36% Net Income.

    Average FY 2012 multiple – 14.92. Friday’s Closing multiple 16.74 (~2% annual growth).

    So what has changed? Certainly not the way AAPL is valued.

    1
    April 29, 2018
  2. David Emery said:
    The one thing Apple could do that would wake up Wall St is to markedly increase dividends. If Apple was paying 4%, like an oil company or telecom, that would bring out a whole different set of investors. And those investors could do the math more easily with stock buybacks, if it was obviously keyed to dividend increases.

    (I’m not saying Apple should do that, but it’s certainly an option. It appears to be to Apple’s credit that the Board does not focus management on quarterly share price!!)

    2
    April 29, 2018
    • Robert Paul Leitao said:
      David:

      The continuing reduction in the fully diluted share count is likely to lead to higher dividends per share over time.

      I agree. A higher dividend yield would attract more growth and income investors. Achieving a higher dividend yield is best accomplished by first reducing the fully diluted share count. Customarily dividends are paid from current income. The lower the share count, the lower percentage of current income that will be deployed to boost the dividend in future years. Over time this is likely to lead to higher dividends per share and a higher dividend yield.

      3
      April 29, 2018

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