2 Misunderstandings Regarding Apple's $14 Billion Share Repurchase

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Another up day for stocks, with the benchmark S&P 500 index and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) rising 1.3% and 1.1%, respectively on Friday. According to Bespoke Investment Group, this marks the first back-to-back 1%+ up days since Jan. 2, 2013. If nothing else, this illustrates the fact that, despite a big run-up in the stock market, volatility was subdued in 2013, and we may be witnessing some sort of return to normalcy in that regard. Shares of Apple (NASDAQ: AAPL  ) outperformed (slightly), up 1.4% (see main story, below the picture).

In an interview with the Wall Street Journal, published on Thursday evening, Apple CEO Tim cook revealed that the company has repurchased $14 billion worth of its own shares in the two weeks since its disappointing fiscal fourth-quarter earnings report on Jan. 27. (The stock fell 8% the next day, its second largest daily drop.)

As I pointed out this morning, if you believe the shares are significantly undervalued at or below current prices, then this is excellent news for Apple investors. Unfortunately, buybacks are not well understood in the financial media; here are two misinterpretations of Apple's action found in the media coverage so far.

Apple was trying to support the stock price with its repurchases
There is no evidence to suggest this is the case. The interview in the Wall Street Journal [sign-up may be required] suggests that Tim Cook was unconcerned about the fact that the stock dropped near $500 after its Jan. 27 earnings announcement other than to observe that it was an overreaction on the part of the market, and that the shares now presented better value than they had at $550. There is a fundamental difference between ramping up share repurchases because one believes they offer better value, and defending a specific price level.

Indeed, Mr. Cook reaffirmed his long-term orientation, stating that he wants to "be able to adjust for the long-term interest of the shareholders, not for the short-term shareholder, not for the day trader." If he were worrying about the stock price on a day-to-day basis, he would be doing long-term shareholders a grave disservice – that's not a good use of his time and mental resources.

This latest round of repurchases has no lasting impact
This criticism is premised on the notion presented above that Apple accelerated its purchases in order to try to give the stock a "boost." The only question that Apple shareholders need to be asking themselves right now is whether or not the stock is significantly undervalued (as Carl Icahn believes). If it is, then, in the words of Berkshire Hathaway CEO Warren Buffett, "no alternative action can benefit shareholders as surely as repurchases."

Far from being fleeting, then, repurchases that meet that condition have lasting impact on per-share intrinsic value. Managements do not control the stock price, but a well-executed share buyback is a direct lever to increase a stock's intrinsic value – that's what they ought to aim for and that is a rational basis on which to assess them. On that score, I have Tim Cook doing a superlative job; Apple shareholders can feel very good about his stewardship.

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Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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