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Last week, I noted Apple's (Nasdaq: AAPL ) incredible recent stock run and decided it was a bit too incredible; I removed my long-standing "outperform" rating on the tech giant in Motley Fool CAPS. Now, on the heels of today's big divi dend and buyback news, I'm going a step further and making an "underperform" CAPScall on Apple.
Today's buzz shows that traditional investors and Wall Street analysts are excited about this planned use of cash, but in reality, Apple's just taking a lumbering (that cash is heavy, after all) step toward impending banality.
The bad side of buybacks
Granted, I can't blame longtime shareholders for being happy that Apple will finally return at least some of its huge cash pile to them through dividends. It's the buyback that makes me nervous.
How many companies have made disastrous buybacks at their stocks' highs? Managements may indicate that their shares are undervalued at the time (and some of them may even believe it), but it doesn't always pan out that way over the long term.
My colleague Morgan Housel outlined the danger of buybacks last year, pointing out the tendency to waste shareholder money.
Sears Holdings (Nasdaq: SHLD ) offers a great example of a company that has squandered shareholder money on share buybacks over the years. In fiscal 2007, it shelled out $2.9 billion on 21.7 million shares at a price of $135. It's currently trading at about $80. For years, the company has used billions in this manner; and even in the cases when it's bought shares at lower prices than today's, let's face it -- Sears is still broken.
More recently, longtime Fool Rich Smith pointed to American Capital and Flowserve as two companies wasting money through buybacks. Seriously, buybacks deserve more than a little bit of shareholder scrutiny.
What happened to "think different," Apple?
Granted, not only is Apple not broke, but it isn't exactly broken, either. I'll grant it's currently a very strong corporate entity in many ways. Its cash and hefty sales of wildly popular products give it security against difficult times. Its products are beautifully designed and well loved. Its current PEG ratio of 0.70 looks insanely cheap.
However, whether today's price really is cheap depends on Apple's ability to continue to be a market leader over the long haul; can it continue to innovate as it did under Steve Jobs? Can it fend off major rivals such as Google (Nasdaq: GOOG ) and Amazon.com (Nasdaq: AMZN ) , whose products and services absolutely pose risks to Apple? Do analysts expect too much from Apple at this point?
The loss of Steve Jobs strikes me as a looming and serious problem for this company. Jobs apparently had many dark personal issues (Walter Isaacson's biography includes many revelations into the makeup of the man), but he also possessed an element that's extremely difficult to replace: true vision and the ability to understand what people want out of technology, before they're even aware of it.
I would have liked to see Apple do something more transformative -- indeed, world-changing -- with its cash collection right now. How about a visionary approach to a shared future, like dreaming up ways to bring more manufacturing back to the United States, perhaps, or creating innovative programs to ensure more scientific and technological know-how in our own students here at home? The U.S. lags many other countries in this area, and these skills are essential for a company like Apple (and our own nation's well-being) over the long term.
In other words, perhaps Apple could have made an investment in a future that transcends "business as usual" and matters to all of us instead of this short-term-oriented plan to simply pay billions to buy back a bunch of its own stock.
That's so Wall Street
Apple's move is bland and way too pleasing to the Wall Street mindset. I believe it's indicative of impending banality, and it flies in the face of the notion that Apple can continue to be a truly incredible, amazing company. That's why I'm putting my "underperform" call on the record and giving Apple the red thumbs down in CAPS. You can track my record here. And you can see some of my colleagues' thoughts here, here and here.