Is Apple's Aggressive Repurchase Program Good For Investors?

In the last two weeks, Apple (NASDAQ: AAPL  ) repurchased a whopping $14 billion of its own stock, according to a report from The Wall Street Journal. The aggressive repurchase program comes after Apple announced weaker than expected iPhone sales for its first quarter, which sparked an 8% sell-off. Does Apple's aggressive repurchase program make sense for investors?

Not all buybacks are good buybacks
First, a buyback needs to be meaningful for it to really matter for investors. What is a meaningful repurchase program? More than $40 billion in repurchases in just twelve months certainly qualifies. That's what Apple CEO Tim Cook asserts Apple has achieved. Further, he noted to the Journal that no repurchase program has ever matched that magnitude in a similar span. Considering that Apple has traded at an average market capitalization close to $450 billion during this period, $40 billion is considerable, indeed.

But meaningful isn't the only qualifying factor for a good repurchase program. The company should also repurchase its shares at a good price. For a repurchase program to make sense, Buffett said in Berkshire Hathaway's 2011 letter to shareholders that the company's stock should be selling "at a material discount to the company's intrinsic business value, conservatively calculated."

To get one of the best examples of a well executed repurchase program, look no further than the world's greatest investor, Warren Buffett. A repurchase program he announced for Berkshire Hathaway (NYSE: BRK-B  ) in 2011 was based solely on valuation. If shares dropped below 110% of book value, Berkshire Hathaway would buy back shares. He later raised that floor for share repurchases to 120% of book value after deciding he thought the company was still a good buy at those levels. Berkshire Hathaway is up about 50% since Warren Buffett initially announced the repurchase program and investors have undoubtedly benefited from the repurchases Berkshire executed.

Buffett also says that a company should have ample cash on hand before a company considers a repurchase program -- at least enough to take care of both its operational and liquidity needs.

Apple's program
Apple's program is a prime example of an investor friendly repurchase program. Ample cash? No problem. The company reported $158.8 billion in cash when it announced its first-quarter results. Is the stock cheap? Apple trades at just 13 times earnings compared to the S&P 500 at about 17.5 times earnings.

Best of all, it's great to see Apple being opportunistic with its repurchase program. Though the company has until Dec. 2015 to repurchase shares, it has already spent the majority of the authorized $60 billion.

Not only is the program very shareholder friendly, but Apple's recent aggressive repurchase of $14 billion of its own stock after a sell-off suggests the board is confident in its pipeline. Apple CEO Tim Cook explained Apple's reason for the aggressive repurchase to The Wall Street Journal:

It means that we are betting on Apple. It means that we are really confident on what we are doing and what we plan to do. We're not just saying that. We're showing that with our actions.

With Apple shares trading lower, maybe hedge fund Carl Icahn will get his wish for an even larger repurchase program after all. Cook told The Wall Street Journal that it plans to share "updates" to its buyback program in March or April.

In a pricey market, solid dividend stocks still offer value
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.


Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2828898, ~/Articles/ArticleHandler.aspx, 8/27/2014 11:13:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement