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Will Carl Icahn Unlock Value For Apple Shareholders?

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Activist investor Carl Icahn has set a new stock in his sights. The noted money manager is pushing Apple (NASDAQ: AAPL  ) to be even more generous than it already is with cash returns to shareholders. Icahn's newest round of activism calls for an additional $50 billion in share buybacks from Apple, on top of the company's current share repurchase authorization.

Apple has already committed to returning a total of $100 billion to shareholders through 2015, $60 billion of which in the form of share buybacks. The remaining $40 billion would be distributed via Apple's dividend payments. In light of Apple's already-massive level of cash returns to shareholders, is Carl Icahn's push for greater cash returns a positive catalyst for the stock? Or, will Icahn merely amount to a distraction that investors shouldn't take seriously?

Carl Icahn's $50 billion wish
It seems Carl Icahn has softened his position on Apple's share buyback. He had originally requested that Apple repurchase up to $150 billion of stock, but scaled back his ambitions. Numbers like these are so huge that it might seem outrageous for an investor to call on any company to return that much to shareholders. But, a glance at Apple's books reveals that these numbers are actually realistic. Apple is quite simply sitting on a cash mountain.

At the end of its most recent quarter, Apple held $147 billion in cash, cash equivalents, and marketable securities.That amounts to 29% of Apple's market capitalization. Apple's cash hoard is obviously impressive in its own right, but even more so when you compare Apple's cash to that of other technology companies, which are traditionally cash-rich. Tech titans like Microsoft (NASDAQ: MSFT  ) and Google (NASDAQ: GOOGL  ) often hold huge cash on their balance sheets, since technology companies usually have little debt to service. Even when you look at Microsoft's and Google's books, you still gain an appreciation for Apple's cash mountain.

At the end of its own most recent quarter, Microsoft held $92 billion in cash, equivalents, and investments on its books. Microsoft is right on par with Apple, since its cash represents 28% of its market capitalization. By contrast, Google held $56 billion in cash and marketable securities at the end of its most recent quarter.That is surely a huge sum, but it amounts to just 15% of Google's market capitalization.

Why a bigger buyback makes sense
Icahn's original $150 billion share buyback proposal likely didn't sit well with management. His more modest $50 billion idea does seem to strike a plausible middle ground. Shareholders would receive the hefty buyback they've long sought after from Apple, which would significantly help boost future earnings per share by reducing the total number of existing shares. This would help grease the wheels to a run back to $700 per share, which Apple investors are eagerly awaiting.

At the same time, a $50 billion buyback would give Apple plenty of financial flexibility to keep investing in its business. Apple could easily borrow $50 billion with extremely low-cost debt. Apple carries a AA+ credit rating from Standard & Poor's, which notes the company's minimal financial risk profile, strong business, and market-leading products. It's likely the share buyback would provide shareholders a return that handily exceeds the cost of debt issued to fund the repurchases, meaning the buyback makes financial sense.

Some investors might have reservations with Apple using such a tremendous amount of money to repurchase shares. It's true that in the technology world, innovation is key, and it may seem dangerous for a technology company to devote so much cash to financial endeavors. However, it's important to remember that Apple is so massively profitable that its cash hoard grows with each passing quarter.

Apple generated more than $45 billion in free cash flow in fiscal 2013. Put simply, repurchasing more of its own stock (and also increasing its dividend) make plenty of sense for Apple. As 2013 draws to a close, it looks like Carl Icahn and all Apple shareholders will have a profitable year ahead in 2014.

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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 December 09, 2013, at 10:55 PM, melegross wrote:

    I would rather see an increase in dividends than another increase in buybacks, which I don't agree has much to do with share price. It's money down the rabbit hole, with no guarantee of increased value. Indeed, they buyback itself destroys value directly.

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