Munster: The Street is wrong about the timing of Apple’s buybacks

“We expect Apple to be net cash neutral in 3 years, ahead of investor expectations of 5 plus years.” — Loup Ventures’ Gene Munster.

From a note to subscribers posted Wednesday morning:

Apple net cash neutral by FY21. Tim Cook said on the Mar-18 earnings call that Apple will be net cash neutral “over time,” but stopped short of specifying a timeline. Over the next 12 quarters, we expect Apple to return $300B to shareholders and to be net cash neutral by the end of the Mar-21 quarter. This would more than double the current pace of capital returns. Apple has distributed $234B over the previous 6 years. As shown in the table below, we expect Apple to maintain, through the Mar-21 quarter, a capital return pace consistent with the just reported Mar-18 pace of $26.8B per quarter ($23.5B buybacks and $3.3B in dividends). This would be made up of about $21B to $22B in share buybacks and cash paid for dividends of $3.4B to $3.7B quarterly. We’re modeling for dividends to increase by 5% each year, in line with the percentage increase in FY17.

Click to enlarge. 

My take: For investors, this means—according to Munster’s calculations—that Apple’s share price should move 24% higher over the next three years on buybacks alone.

12 Comments

  1. Michael Thompson said:

    Munster’s chart should also include Apple’s projected Free Cash Flow during the three year period. Apple’s FCF is a major variable and determinant in the timing of when Apple reaches net cash neutral.

    In any case, Apple shareholders will do the laughing over the next three years and beyond.

    3
    July 11, 2018
    • Robert Paul Leitao said:

      Michael:

      One more thing to consider is the debt level will be gradually diminished as the instruments reach maturity. Apple is no longer adding debt and each year the total debt will be diminished. According to Apple’s 10-Q for the March quarter, of the $101 billion in debt, $8.5 billion is classified as “current” debt to be repaid.

      1
      July 11, 2018
      • Michael Thompson said:

        Yes, that is a smart point that others fail to recognize regarding Apple’s debt. Apple has laddered its debt so that xyz billion in principal comes due annually. Unless Apple takes on more debt to pay off the old debt, Apple’s long-term debt will decline annually.

        The exact figures are available in the 10Q.

        0
        July 12, 2018
  2. Jonathan Mackenzie said:

    I think he has a good description of the size and scope of this move towards net cash neutrality. But it appears to me that the dividend will need to increase faster than 5% because they will be retiring more than 5% of shares annually.

    0
    July 11, 2018
  3. Robert Paul Leitao said:

    I agree with Mr. Munster. Apple won’t take five years to reach a net cash neutral position. By not specifying a specific timeframe management affords itself some flexibility on cash deployment and the pace of repurchases.

    Obviously, the lower the share price when shares are repurchased the more shares that will be repurchased over time. Consequently, I expect Apple to deploy more cash for repurchases on a quarterly basis through the March quarter of FY2019 than may be deployed after that time. In other words, I expect more than $21.4 billion per quarter (Mr. Munster’s example) over the next four quarters (inclusive of the recently completed June quarter) to be deployed for repurchases. I’m looking for about $25 billion in repurchases per quarter, on average, over this four-quarter period.

    I also don’t expect the cash deployed for dividends to remain fairly static (as Mr. Munster’s example suggests). I expect Apple to continue with dividend increases over the next three years in the range of 10% per year. As Apple moves quickly to deploy cash for repurchases now, the greater the likelihood of higher dividends per share later. Apple can easily increase the percentage of net income deployed for dividends and the percentage of cash returned to shareholders in the form of dividends versus repurchases as we move further along on Mr. Munster’s three-year example.

    I’m not criticizing Mr. Munster’s work. The work is a good basis for conversation. As for the share price, the fewer shares in the fully diluted share count the higher the earnings per share share on the remaining shares. Even if the price-earnings multiple were to remain fairly constant at today’s level, the share price will move higher due to the reduction in the fully diluted share count.

    2
    July 11, 2018
    • Gregg Thurman said:

      Focusing on the amount spent on share buybacks may be a mistake. I don’t see a lessening in the amount spent per quarter so much as I see a decline in the number of shares purchased. This is just a result of higher share costs over time.

      0
      July 11, 2018
  4. Fred Stein said:

    Apple recently increased dividend by 16% ($.40) annually after years of 10% annual increases. Knowing how the market over-reacts, Apple will likely continue the new pattern, 16% of $.40 or something close to that.

    0
    July 11, 2018
    • Gregg Thurman said:

      I think Apple will set dividends at about 3% of share value at the time of declaration vs a “percentage” YoY increase.

      0
      July 11, 2018

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