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What If Apple Followed Warren Buffett's Advice?

Daniel Sparks
March 13, 2013

Apple (NASDAQ: AAPL) will announce plans for its cash hoard next month, according to Howard Ward, chief investment officer atĀ investment firm Gamco. But if this rumor proves true, the most important question remains unanswered: How will Apple return cash to shareholders? Would the company be wise to take ace investor Warren Buffett's advice, and repurchase more shares?

Share buyback programs enhance shareholder value
Share buybacks offer corporations a tax-free way to build shareholder value by buying back their own shares and, in turn, increasing shareholders' ownership percentage per share.

Buffett has been known to criticize companies for buying back their shares, but it's never because he thinks share repurchase programs are inherently bad. Instead, he criticizes companies for overpaying for their own stock.

As Buffett outlined in the 2011 Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) letter to shareholders, he "favor[s] repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated."

When a company buys back its own shares, they should be "purchased below intrinsic value," Buffett explains. Price is everything: "The first law of capital allocation -- whether the money is slated for acquisitions or share repurchases -- is that what is smart at one price is dumb at another."

With $137 billion in cash and investments, Apple has plenty of excess cash. As far as the second condition, Buffett signaled a go-ahead in his March 4 appearance on CNBC, when he commented on Apple's cash hoard, "But if you could buy dollar bills for 80 cents, it's a very good thing to do."

Comparatively cheap and ripe for a buyback
Even if Buffett thinks Apple is cheap, Berkshire didn't disclose any positions in Apple in the its Feb. 14 13-F filing with the Securities and Exchange Commission. His comments, nevertheless, are encouraging to Apple shareholders.

Investors don't need to look far for proof that Apple is cheap. Based solely on fundamentals, Apple appears cheaper than nearly every company in the S&P 500.

Even Berkshire has made investments in both IBM (NYSE: IBM) and Inte