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.
If Apple spends $200 billion, the share price goes to $244 without changes in the P/E ratio.
If Apple spends $300 billion,* the share price goes to $290 without changes in the P/E ratio.
*$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.
And undervaluing AAPL just increases the speed at which that happens.
However, when Berkshire discloses its 13F filing on 5/15, we will learn that Buffett bought millions more shares through 3/31/18. I would assume that his $3.3 Billion sale of PSX directly back to the company was most likely allocated to buying more Apple shares during the correction to 150 in February.
From my calculations, Apple started with 6.6 Billion shares outstanding when this buyback program was started. When Apple reports on Tuesday after the bell, we will learn that shares have fallen to nearly 5 billion even. Thus the percentage of shares that Apple has reduced outstanding float is 24.2% +/- as of 3/31/18. We will have a 26% or higher reduction as of 6/30/18 and will likely approach more than a 30% reduction by the end of the calendar year.
The proverbial high water mark for the fully diluted share count was in FQ4 2012. The count was reported at 6.637 billion shares. This followed a ballooning of the fully diluted share count in the first decade on the new millennium. At the end of the December quarter (FQ1 2018), the count was reported at 5.158 billion shares.
What isn’t often mentioned in discussions about Apple’s share repurchase program is much of the compensation for the company’s engineers and executive talent is stock-based compensation. In fiercely competitive Silicon Valley, compensation through stock-based incentives can be an important component of the employment package.
There’s no guarantee share repurchases will boost a share price. But the size of Apple’s repurchase program matched with rising net income increases the probability that the share price will rise and the repurchase program will assist in putting a floor under the share price. Remaining competitive in the ability to attract the best talent does necessitate efforts to increase the share price on a long-term basis. This of course benefits all shareholders of the company.
On your other point, I wouldn’t be surprised if Mr. Buffett increased his company’s position in Apple during the March quarter.
The interesting thing that I will follow as the larger share buyback gets underway, is who is going to be giving up their shares, institutions or retail shareholders. Currently about 62% (Over 3 Billion shares) of Apple are owned by institutions. I know that my shares are NOT for sale, now or ever. As stronger and fewer shareholders remain, we might see far less volatility in the stock.
I forget where the threshold is (7.5%?) but when an investor holds more than that (through acquisition) he must make an off er the entire company. Robert you may be more knowledgeable about this than I.
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.
Share repurchases will move the PPS higher, but Wall Street has already baked in a certain level. If the share price remained at $165 after a $300B buyback, the P/E would have to compress to 9, which is ridiculous.
Whatever amount is designated for buybacks, shareholders are going to own a larger percentage of a company generating approx. $60 FCF. That’s real.
(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!!)
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.