I may not be as rich and famous as Carl Icahn, and my stake in Apple (AAPL +0.04%) is worth a minuscule fraction of his $2.5 billion position. But I have been an Apple shareholder for a much longer time – since 2009 – and I'm planning to stick with the company for years to come. This is a marriage, not a one night stand for me, so I decided to write my own letter to Tim Cook.
Forget about Icahn
To begin with, please forget about Carl Icahn and the $150 billion buyback program he proposes in his letter. Don't get me wrong, I believe Apple is deeply undervalued, and Mr. Icahn is right in pointing out that the opportunity to repurchase stock at these attractive levels isn't likely to last forever. Repurchasing stock is the right thing to do, especially with the stock trading at a dirt cheap P/E ratio around 13.
The $60 billion program you currently have in place is a good start, and it should also be accelerated and increased. But I believe you should do it gradually over time as opposed to the huge and immediate $150 billion repurchase Mr. Icahn is arguing for.
The same goes for for dividends, we long term investors – a group in which Mr. Icahn is not necessarily included -- really appreciate consistently growing dividend payments and stock buybacks over the years. In addition to an extra source of returns, recurrent capital distributions can do wonders in terms of transparency and tranquility of mind for shareholders.
The value of flexibility
No doubts Mr. Icahn is a very smart man, but he is a financier, not a tech guy. You don't need me to tell you that things change rapidly in the tech industry, and having plenty of financial resources available just in case is always a good idea.
Back in 1996, Apple made an acquisition which literally saved the company by purchasing Next for $400 million and bringing Steve Jobs back on board with the transaction. The company is in a very different situation nowadays, but you never know what kind of technologies or assets may become valuable for the company in the future.
Apple is not an aggressive acquisitor, but you may want to purchase a supplier or a competitor to strengthen your competitive position in the industry. Acquisitions are not only intended for growth, they can also be defensive moves when a company buys a disruptive technology only to take it away from the hands of the competition.
Apple is a high-end brand, but what if you want to enter new categories like smartwatches or smart TVs with aggressively low prices to gain market share? In that case, having a big cash hoard would provide peace of mind for the company and its investors.
Keep your eyes on the ball
Products are the key to Apple's future. Bigger capital distributions could send the stock price higher in middle term, but long-term returns will depend on its ability to innovate and deliver high quality products over the years.
I know you have some enormously big shoes to fill Mr. Cook, and it would be unreasonable and even unfair to expect from Apple the same kind of explosive innovation it delivered under Steve Jobs.
But you still have a high performance team on board, including a genius like vice President of Design John Ive who worked side by side with Steve Jobs when creating Apple's most disruptive products. Apple is unquestioningly one of the most valuable brands in the world, and the company has a huge and loyal fan base providing a big advantage when it comes to introducing new products.
Apple has what it takes to continue innovating over time, and long term investors are expecting precisely that from you and the rest of the team.
Money and innovation
Apple spends considerably less than competitors in research and development, while the company invests 2.5% of sales in R&D, Google (GOOG 3.85%) spends 13.5% of its sales in that area and Microsoft (MSFT 2.77%) is at a similar level with R&D expenses representing 13.3% of revenue.
Innovation is about much more than money: Corporate culture and leadership are absolutely paramount, and the comparison between Google and Microsoft shows this very clearly.
Google has been one of the most innovative companies in the last decade, building apps and services like its search engine, Maps, Gmail, Android, and Chrome among other big blockbusters. In addition to that, Google is developing projects with amazing long-term potential like self-driving cars or augmented reality glasses.
Microsoft, on the other hand, has missed many of the most important trends in the industry like mobile computing, social networks, and online advertising to name a few noteworthy examples. There are some things money can't buy, and one of those is a dynamic and forward-thinking culture of innovation, that's why the coming change in top management could be precisely what Microsoft needs if its going to regain the lost ground.
Going back to Apple, I'm sure you are not being cheap on R&D, the company is most likely spending all the money it considers useful in that critical area. But if you ever need to chose between share buybacks or investments in more productive areas like R&D, you know where this humble long-term investor stands.
Bottom line
Mr Cook – can I call you Tim at this stage of our "imaginary relationship?"-- please forget about Mr Icahn's gigantic buyback idea. Apple should increase its capital distributions over time, but only at a comfortable peace and maintaining abundant financial resources at hand for safety and flexibility. Buybacks and dividends are important, but the future of the company depends on its products.
Editor's Note: Apple bought Next in 1996, not 2006. This version has been corrected.
