For much of 2017, shares of Apple (NASDAQ:AAPL) surged higher, driven primarily by the growth of the company's services business and excitement about the new iPhone X. However, various negative reports about iPhone X demand have surfaced in the past month, taking some of the shine off the stock.
One analyst thinks that a rising tide of share buybacks -- enabled by the recently passed tax reform bill -- could propel Apple stock higher in 2018. In fact, Steven Milunovich of UBS expects Apple to buy back $122 billion of stock over the next two years. However, that eye-popping figure isn't as impressive as it might seem at first glance.
There will be a lot of cash available
As of the end of September, Apple had $252.3 billion of cash and investments held outside the U.S. in order to avoid stiff repatriation taxes. That probably increased to at least $270 billion by the end of December, as Apple usually produces very strong free cash flow during its first fiscal quarter.
Under the new tax reform law, Apple will incur a one-time repatriation tax of 15.5% on its overseas cash and investments, less than half of what it might have owed otherwise. Assuming conservatively that Apple had $270 billion held outside the U.S. at the end of last quarter, this tax bill would come to just shy of $42 billion, leaving Apple with an extra $228 billion to use for buybacks, dividends, acquisitions, research, or any other purpose.
Most analysts assume (quite reasonably, in my opinion) that Apple will set aside a bunch of its overseas cash to pay down debt, while using most of the rest to buy back its stock. Milunovich gets to his $122 billion estimate by assuming that the company will produce about $60 billion of free cash flow annually and maintain net cash of $90 billion.
This level of buybacks wouldn't be that unusual
This $122 billion might seem like a huge number. However, it doesn't look quite as impressive when compared to Apple's buyback activity over the past five years.
In total, Apple has repurchased $166 billion of stock during this period. Furthermore, looking just at the two-year period beginning in April 2013, the company spent $78 billion on buybacks. Since its stock price was much lower at this time, $78 billion was enough to reduce the share count by 818 million (on a split-adjusted basis). To buy back 818 million shares at today's stock price, Apple would need to spend upwards of $140 billion.
Thus, repurchasing $122 billion of stock within a two-year span might itself be unprecedented, but that sum wouldn't buy as much Apple stock as the company repurchased during its most productive two-year period for share buybacks.
Furthermore, Apple stock trades for about 15 times its projected fiscal 2018 profit. While that's relatively cheap compared to the market as a whole, it's near the high end of the stock's long-term trading range. Thus, multiple contraction could potentially offset the EPS benefit of shrinking the share count with buybacks.
There are other reasons to own Apple stock
The potential for $122 billion of share buybacks isn't a good enough reason to own the stock. However, Apple may take a more aggressive approach to returning cash to shareholders, which could have a more meaningful impact on the stock price. For example, if it opted to maintain $10 billion of net cash instead of $90 billion, that would free up another $80 billion for buybacks in the next year or two.
Meanwhile, on the business side, strong demand for the iPhone X in China could potentially power Apple to much stronger profit growth than investors currently expect. Furthermore, the growth of Apple's services business could convince investors to award Apple a higher earnings multiple. Either development could help the shares break out of their recent funk.
Thus, there are plenty of potential catalysts that could justify owning Apple stock right now. But the mere prospect of $122 billion of share buybacks in the next two years wouldn't by itself be enough to keep the stock marching higher.