1 Reason to Own Apple Stock

The same key driver behind Apple's stock 54% run-up in the past year should continue to boost shareholder value for years to come.

Daniel Sparks
Daniel Sparks
Jul 26, 2014 at 9:45AM
Technology and Telecom

In the past four quarters, Apple's (NASDAQ:AAPL) year-over-year quarterly revenue growth rates have remained mostly the same, ranging between 6% and 4 %. But despite no ramp in Apple's top line growth, the stock has soared 54% during this same period. While a number of factors likely serve as drivers to the increasing optimism on the Street regarding Apple stock, one key factor is certainly Apple's share repurchase program. Indeed, even after the run-up in share price, Apple's heady cash flow that enables share repurchases and dividends is still a great reason to own the stock.

The share repurchase program that may live on for a decade
It's incredibly difficult to predict anything in the stock market more than 10 years out, but looking out into the next decade, there's one thing regarding Apple that seems fairly clear: The tech-giant will likely continue to authorize meaningful share repurchases.

Currently, Apple has authorized a $130 billion capital return program. Apple has specifically purposed $90 billion of this amount for repurchasing shares. Fortunately, Apple has been incredibly aggressive in repurchasing shares, already spending $51 billion of the authorized amount for repurchases with six quarters remaining on the program. 

To add perspective of just how significant a $90 billion repurchase program is for Apple, consider that this amount is equal to 15.5% of Apple's total market capitalization today. A program this significant is bound to build shareholder value -- especially when shares are repurchased at good prices.

But how in the world is a program like this sustainable? Here's how: $48.1 billion in annual free cash flow. Apple's free cash flow is the good stuff that's left over after day-to-day operations are taken care of and capital expenditures are accounted for.

This is enough cash to meaningfully move the needle with share repurchases for the foreseeable future. While Apple's paying out about $12 billion of this free cash flow annually in dividends, this still leaves a whopping $36 billion in annual free cash flow. Best of all, there's no sign this cash flow is going to decline in the near future.

How Apple leverages earnings growth
To illustrate just how powerful repurchases can be, consider Apple's most recent quarter. Thanks to share repurchases, total share count was reduced by 7% from the year-ago quarter. This means Apple effectively boosted earnings per share, or EPS, by 7% by repurchasing shares alone. Add in Apple's net income growth, and the company's total year-over-year EPS growth was a sweet 19.6%.

In short, this chart sums up my favorite reason to own Apple stock.

AAPL Average Diluted Shares Outstanding (Quarterly) Chart

AAPL Average Diluted Shares Outstanding (Quarterly) data by YCharts

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Even after the recent run-up in Apple's share price, a conservative price-to-earnings ratio doesn't fully appreciate the potential of Apple's lucrative free cash flow that looks poised to continue. Over the long haul, Apple is likely to continue to be able to both repurchase shares and increase its dividend.

Combine a likely favorable capital return program, for the foreseeable future with potential organic net income growth stemming from continued growth in iPhone sales and new product categories, and Apple is a solid bet for the long haul.