Neil Cybart takes a deep dive into Apple buyback program

From a note to Above Avalon subscribers ($) that landed on my desktop Wednesday:

Apple has the largest share buyback program in the world. With $90 billion put into buyback in just the past 12 months, the company’s buyback strategy continues to draw questions.
    • 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)
Apple began buying back shares at the end of FY2012. Over the span of ten years, Apple has spent $554 billion buying back 11.7 billion shares at an average price of $47 per share. Since the shares were retired, Apple is not sitting on a $1.2 trillion profit from buyback. The total number of Apple shares outstanding is now 39% below peak levels. This is another way of saying that Apple has repurchased more than a third of itself over the past ten years.

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.

16 Comments

  1. Michael Goldfeder said:
    The Board of Apple in approving these large buybacks has a much better understanding than anyone else as to the value of both current and future products in addition to FCF. My hunch is they see this stock at a $200.00 level and being able to retire stock in the current $130-150 range is a fire sale of sorts in their opinion. Or it’s also entirely possible, although inconceivable, that they just want to make Joseph Bland and Warren Buffet happy.

    8
    November 23, 2022
    • Romeo A Esparrago Jr said:
      I vote B for Bland Buffet. Delicioso.
      🙂

      2
      November 24, 2022
  2. Mordechai Beizer said:
    This has probably been addressed several times but I’d like to confirm my thinking. Is it reasonable to lump together dividends and share repurchase and think of Apple shares as having a 4.8% yield (100B buyback + 15B dividend) / (2.4T market cap). Of course 4.17% of that is actually in the form of earnings growth attributable to the 100B buyback. Then there would be organic earnings growth above and beyond that attributable to buybacks. If P/E ratio and profit margin were to stay the same then organic earnings should be the same as the revenue growth percentage (big assumptions there, I know it’s a static analysis).

    So a SWAG for expected return on Apple next year (dividend + stock appreciation) is 4.8% plus your guesstimate of revenue growth in the coming year. Reasonable? Or did I go off the deep end in my analysis?

    2
    November 23, 2022
    • Fred Stein said:
      Yes, quite reasonable.

      It’s like an automatic DRIP, Dividend Re-Investment Plan, with the advantage of no tax impact until one sells AAPL.

      1
      November 24, 2022
  3. Robert Paul Leitao said:
    Neil’s numbers are not quite complete. For example, in FY2022 share repurchases of $90.2 billion, combined with dividend distributions of $14.80 billion and net cash settlements of $6.2 billion works out to total capital return disbursements of $111.2 billion. This is against net income for the fiscal year of $99.803 billion. In other words, Apple has recently been returning to shareholders through share repurchases (open market and ASRs), dividends and net share settlements more than the company is generating in net income. Through the end of the September quarter, Apple has cumulatively returned to shareholders slightly more than the total amount of earnings since the company went public. Apple’s retained earnings balance at the end of FY2022 was -$3.068 billion. Apple’s net cash balance at the end of the fiscal year closely tracks to the remaining net shareholders’ equity as of the end of the fiscal year. Continuing to return capital in excess of net income would be challenging to sustain on a long-term basis. If Apple were to tie total capital returns in the form of dividends, share repurchases (open market and ASRs) and net share settlements to annual net income, it’s likely the capital deployed for share repurchases (open market and ASRs) would need to be reduced in future years. While Apple might be likely to increase net income in most years, annually rising net income is not guaranteed. In three of the ten most recent fiscal years (FY2013, FY2016 & FY2019) the company experienced negative net income growth. In other words, with cumulative retained earnings depleted, total capital returned to shareholders may track close to net income provided more capital isn’t needed for strategic initiatives. The rate of growth in the dividend, especially in an environment of rising interest rates, may exceed the rate at which the fully diluted share count is diminished on an annual basis thus marginally reducing the capital available for repurchases in future years as the cash deployed for dividends increases each year.

    1
    November 24, 2022
  4. Bob Goldstein said:
    Neil asks this:
    “What is Apple’s ultimate objective in repurchasing shares”
    I never thought it has to do with Apple going private which has been brought up in other articles over the years
    I have always thought the objective is to become the company that takes the greatest care of their shareholders by becoming the largest dividend providing company by dramatically reducing its shares

    2
    November 24, 2022
  5. Fred Stein said:
    One more reason for buybacks: Employee stock incentives.

    It’s two advantages. 1) Buybacks increase the safety of future vesting even if there are short term downturns. 2) Employees don’t have to worry about when to sell the shares they already own

    4
    November 24, 2022

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