In the last two weeks, Apple (AAPL -1.96%) 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 (BRK.B 0.40%) 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 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.