Apple's Share Repurchase Program Could Bring an Upside

Apple's (NASDAQ: AAPL  ) share repurchase program is a great way for the company to return value to shareholders. But to what extent, exactly, does it change the game for Apple investors?

Let's find out.

Apple has authorized a total of $60 billion in share repurchases. Even though the company has until the end of 2015 to follow through with this plan, it has already spent 30% of its allowance, leaving just about $42 billion left to spend.

To highlight the difference this $42 billion could make for investors, I'll value the stock based on two scenarios. In scenario one, Apple doesn't repurchase $42 billion in shares. In scenario two, Apple does -- at an average price of $495 per share.

Valuation without a buyback
Assuming a 10% discount rate and a projection for 3% annual growth in EPS going forward, a discounted cash flow valuation yields a fair value for Apple shares of $618.

Even at $618, Apple trades with a 25% margin of safety -- certainly not bad.

Valuation with a buyback
The story changes quite dramatically when you factor in the $42 billion Apple will inevitably spend before the end of 2015. At an average price of $495 per share, Apple could retire 84.85 million shares.

How does this affect Apple's valuation? Significantly. Adjusting for the buyback, Apple shares are worth about $684 per share. This means the stock is trading with about a 32% margin of safety, more than enough for my comfort.

Sure, maybe Apple won't be lucky enough to purchase its own stock for an average price of $495. But if you're in the camp that believes this, then that means you probably believe Apple is likely to be undervalued today.

And if you believe Apple shares will remain where they are today, or even sink, then that means Apple will be able to buy back even more shares, returning even more incremental value to shareholders.

Don't underestimate Apple's cash hoard
Now that you've seen how much Apple's current share repurchase program can positively affect valuation, keep in mind that Apple has far more than $42 billion lying around. Today, its cash hoard amounts to a whopping $146 billion. And don't forget about the approximately $2.8 billion the company pays out in dividends each quarter.

When it's all said and done, Apple is fundamentally cheap.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 04, 2013, at 7:11 PM, Kahokfan67 wrote:

    Apple could retire 84.85 billion shares. Really? I thought there was only 908,000,000 shares outstanding. I assume you meant 84.85 million not billion.

  • Report this Comment On August 04, 2013, at 7:18 PM, DanManners wrote:

    Daniel,

    Jason Schwarz outlined recent how with buybacks continuing with cash earned over 10 years, 3 % growth and an increasing share price, the stock will be at $ 5000 within 10 years.

    His newsletter Economictiming.com readily reviews Apple's stock position. A must have.

    I have repeatedly said that the chances of Apple having another breakthrough product is low but they will continue to put out pretty good stuff and make money. Those earnings need to buy back stock as Apple does little else with it.

    Buybacks recently put a floor under the stock and further buybacks will remove the most liquid of shares creating a vacuum and the shares should rally. Cramer said this is why many companies are going up as buybacks are being done.

  • Report this Comment On August 04, 2013, at 10:32 PM, twolf2919 wrote:

    I'm curious as to why you used $495 as the average repurchase price?

  • Report this Comment On August 05, 2013, at 10:22 AM, TMFDanielSparks wrote:

    @twolf2919

    I assumed Apple's stock price would appreciate about 20 - 30% by the end of its fiscal 2015 fourth quarter and Apple would continue to spend more heavily at the beginning of the share repurchase program in order to take advantage of its cheaper shares.

  • Report this Comment On August 05, 2013, at 11:01 PM, dwilh51183 wrote:

    what about the 30 million shares that are "short" aapl. they will have to buy back aapl shares sooner or later and thats worth at least 100 $ a share. i believe Apple will come out with new products

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