Apple's $14 Billion Opportunistic Buying Spree

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.

The U.S. economy added 113,000 jobs last month, the Labor Department reported on Friday. That was short of the 181,000 consensus estimate, though net revisions for November and December were up 60,000. Nevertheless, U.S. stocks opened higher on Friday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.40% and 0.22%, respectively, at 10:15 a.m. EST. Shares of the world's most valuable company, Apple (NASDAQ: AAPL  ) , are outperforming this morning.

Last week, I wrote that Wall Street's disappointment with Apple's earnings was an opportunity for investors; shares declined 8% on Jan. 28, their second-largest one-day drop, as the company missed expectations on iPhone sales. Legendary investor Carl Icahn took advantage of the overreaction, picking up $500 million worth of shares that day, to add to a position that now totals between $3.5 billion and $4 billion. He isn't the only one who acted opportunistically.

In an interview with The Wall Street Journal, Apple CEO Tim Cook said the company had purchased $14 billion worth of shares since reported its financial results, adding that he was "surprised" by the market's reaction on Jan. 28 and wanted to be "aggressive" and "opportunistic." This is fantastic news for shareholders; as Warren Buffett wrote in his 1984 Berkshire Hathaway shareholder letter:

When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.

Apple's latest action bring total stock buybacks over the past 12 months to more than $40 billion. Last April, Apple raised its capital return program (i.e., dividends and repurchases) by $55 billion to roughly $100 billion. That isn't enough for Icahn, who penned a 3,000-word letter to Cook last month in which he called Apple "perhaps the most overcapitalised company in corporate history."

On Feb. 28, shareholders will get the opportunity to vote on Icahn's motion that Apple repurchase $50 billion above the current plan before the end of September. Apple has recommended voting against the motion, and I think that is absolutely sensible. I like Cook's blend of conservatism and opportunism; he told the Journal 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. We may see a huge company tomorrow that we want to acquire or something may happen in the stock market that's unpredictable."

That echoes Buffett's comments from last October, when he was asked to address Icahn's campaign to get Apple to increase its repurchase program:

I think the Apple management and directors have done a pretty darned good job of running the company, and so my vote would be with them. I do not think that companies should be run primarily to please Wall Street, and largely shareholders who are going to sell.

As far as addressing concerns regarding the lack of new products from Apple, Cook said: "There will be new categories. We're not ready to talk about it, but we're working on some really great stuff," before emphasizing that anyone "reasonable" would consider what Apple is working on as new categories.

Icahn has praised Apple's management when it comes to running the business; his only complaint is with capital allocation. With this latest round of stock buybacks, I think Apple is demonstrating its acumen in that area, too -- to the great benefit of long-term shareholders.

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  • Report this Comment On February 07, 2014, at 11:08 AM, Sketch71 wrote:

    I voted my meager shares with Mr. Cook's recommendation and against Mr. Icahn's proposal. This is such a well-run company, what reason is there to question their capitalization decisions?

    Additionally, Apple can only spend so much on dividends and buy-backs before dipping into overseas cash and subjecting itself to taxes, and voluntarily paying extra taxes is certainly not in line with either the company's or shareholder's long-term interests.

  • Report this Comment On February 07, 2014, at 11:12 AM, TMFAleph1 wrote:

    @Sketch71

    Thanks for your comment.

    To be clear, Icahn's proposal doesn't call for a repatriation of overseas funds, which would indeed trigger a tax payment; instead, Icahn recommends Apple finance the incremental buyback with a debt offering.

  • Report this Comment On February 07, 2014, at 3:54 PM, FoolishLonghorn wrote:

    As an Apple shareholder, although I hold a few less shares than Mr Icahn, I also voted against this proposal.

    If Icahn feels he can do a better job at running a company, he has the funds to buy one outright.

    Then he can run it as he chooses

    Icahn is the epitome of the activist shareholder, wreaking havoc and distracting company leaders without adding any value. When people rail about Wall Street dirtbags, they are talking about Icahn and his ilk.

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