From a note to Above Avalon subscribers ($) that landed on my desktop Wednesday:
- What is Apple’s ultimate objective in repurchasing shares?
- What will happen to Apple’s buyback program once the company reaches its net cash neutral goal?...
The following contains Apple’s share buyback activity by year:
- FY2012: $2 billion (ASR [accelerated share repurchase])
- 2013: $21 billion ($12 billion was ASR)
- 2014: $45 billion ($21 billion was ASR)
- 2015: $37 billion ($6 billion was ASR)
- 2016: $29 billion ($12 billion was ASR)
- 2017: $33 billion ($15 billion was ASR)
- 2018: $73 billion ($5 billion was ASR)
- 2019: $67 billion ($12 billion was ASR)
- 2020: $73 billion ($16 billion was ASR)
- 2021: $86 billion ($5 billion was ASR)
- 2022: $90 billion ($6 billion was ASR)
My expectation is that Apple will continue to pour most, if not all, of its free cash flow into share buyback and cash dividends. If we assume that Apple will bring in $100B of free cash flow in FY2023, the company can maintain its $90B on buyback and $15B on cash dividends while only reducing its $49 billion of net cash position by $5B. Accordingly, it’s possible that once net cash is reduced to zero, there wouldn’t be much change to Apple’s buyback pace. Management will simply tie its buyback pace to free cash flow generation.
Apple has used its FY2Q earnings release to announce annual updates to its share buyback program. My expectation is that Apple’s board will approve a $100B increase in buyback authorization in Spring 2023. This estimate reflects Apple’s current share buyback pace, the amount of authorization remaining, and near-term free cash flow generation. With Apple buying back shares in the $160 to $180 range earlier this year, management likely looks at the company’s intrinsic value as being materially higher. This means that Apple’s intrinsic value implies a forward P/E multiple in the mid-20s, at a minimum, with free cash flow yield closer to 2% to 3%. As long as shares trade under those metrics and free cash flow generation remains robust, Apple’s share repurchases will likely continue indefinitely.
My take: This is for you, Joe Bland.