The implications of apple’s updated capital repayment program (part 2)

On April 23 of this year, Apple closed at $400.81 before reporting its Q2 earnings later that afternoon. Along with an unspectacular earnings report, the company increased its share buyback program to $60 billion, to be completed by the end of calendar 2015. We discussed the possible implications of this measure that day.

Since then, AAPL has reported Q3 earnings, and closed today nearly 25% higher, at $489.57. 

Apple’s original buyback called for 0 billion in share repurchases, commencing in September 2013 and concluding no later than December 2015, for the purposes of offsetting dilution from employee-related share issuances. If executed evenly, this would have resulted in about $769 million spent each quarter on share repurchases.

After buying back about 2.5 quarters’ worth – .95 billion – of shares in Q1 2013, AAPL did not repurchase any stock in Q2 2013. However, the expanded buyback program of an additional $50 billion by the same December 2015 deadline increased the average quarterly repurchase amount to about $5.315 billion – far more than necessary to simply offset share dilution.

Somewhat lost in the media reports of Apple’s better-than-expected Q3 was the incredible 6 billion the company spent on repurchasing its own stock in the quarter – over a quarter of the entire amount allocated to buybacks. Peter Oppenheimer, Apple’s CEO, gave the following clarity on the state of share repurchases in Q3 2013:

  • The final $50 million of a $2 billion ASR* program initiated in Q1 2013
  • 2.5 billion on a second ASR*, which closes in fiscal 2014
  • $4 billion through buybacks on the open market
  • Another 11 million shares stand to be retired as a result of June quarter events (no further detail was provided)
  •               *Under the terms of an ASR, AAPL entered into agreements with two financial institutions. Generally, these institutions will borrow shares, to be given, to Apple from their clients. The institutions would therefore have to purchase AAPL shares at a future point in time at an uncertain price. As a result, Apple likely paid a premium on the current share price at the date of the agreement to fix a share price for the program and to compensate the institutions for the risk they would be taking. 

    As a result of these expenditures, about 34 million AAPL shares were retired, reducing the diluted share count by about 23 million shares after employee issuances. These expenditures, relative to the per quarter average of the buyback programs, are depicted below:

    Clearly, Apple’s management team felt that the price of AAPL stock in Q3 2013 presented a buying opportunity attractive enough to allocate over three times the average quarterly allocation of the company’s buyback program to repurchasing stock in that quarter. Further, assuming an average share price of $470 for the quarter, the 11 million shares in the process of being retired will have already accounted for nearly Q4′s entire $5.315 billion allocation.

    We previously outlined the rationale behind our belief that Apple’s period of gross margin contraction are ending and a number of near- to mid-term catalysts are poised to send AAPL surging in a five-part series. It stands to reason that should management be of the same opinion, they would be foolish not to concentrate buyback expenditures in periods where the stock price is low. Consider the impact that AAPL’s share price can have on the average $5.315 billion quarterly buyback allocation:

    On an annualized basis, this represents a range of about 6% of currently outstanding shares at $400 to about 3% of currently outstanding shares at $800.

    The implication of this wasn’t lost on Carl Icahn, who today tweeted that he believes AAPL is “extremely undervalued” and has had conversations with Tim Cook about having a “larger buyback done now” [emphasis added]:

    A “larger” buyback “now” would constitute more than 6 billion of stock to be repurchased this quarter. In other words, Icahn believes that just two quarters after announcing the expanded buyback, Apple should have spent nearly two-thirds of the allocated funds. This would leave about $20 billion to be spent on repurchases over the following 9 quarters – at about $2 billion/quarter, only a little more than necessary to offset employee share-related dilution.

    One might posit that Mr. Icahn senses that near-term catalysts are upcoming, and could light the fuse on AAPL, sending a flood of momentum and growth oriented traders and investors scrambling to get back into the stock.

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