Late last month, hedge fund manager Eric Jackson opined that Apple's (NASDAQ:AAPL) capital return program has been a $100 billion (and growing) waste of money. He called the capital return program Tim Cook's single biggest mistake as CEO of Apple.
Instead, Jackson thinks that the money Apple has spent on buybacks and dividends should have been spent on acquisitions and research and development expenditures to support future growth.
However, this perspective creates a false dichotomy between returning capital to shareholders and investing in growth. Moreover, it ignores the fact that long-term EPS growth is the real way to maximize total shareholder return -- the only thing that investors really care about.
Investing vs. returning capital
As of late September, Apple reported that it had returned about $94 billion to shareholders through dividends and share repurchases. It has spent $24 billion on dividend payments and $68 billion on share repurchases. (I believe the remaining $2 billion represents the cost of using net-share settlement to reduce the number of shares issued as stock compensation.)
Jackson argues that this money would have been better spent primarily on acquisitions. He mentions Tesla and Twitter as two companies that Apple should buy right now. He also wants Apple to ramp up R&D spending in order to build better batteries and to develop new killer features that will give Apple a leg up against Android.
He admits that Apple "wouldn't have much revenue to show" for these acquisitions and the incremental R&D. However, Jackson believes that these moves would have been just as good for Apple stock as the capital return program, because they would have shored up investor confidence in Apple's long-term growth and margin structure.
Where's the conflict?
The main mistake Jackson makes is assuming Apple's capital return plans and its ability to acquire/invest in R&D are mutually exclusive. For most companies, this assumption might make sense: capital is scarce.
For Apple, capital is not scarce in any meaningful way. It has more than $150 billion of cash and investments on its balance sheet. (Even accounting for potential repatriation taxes, Apple has at least $100 billion available.) It could also issue more debt -- Verizon has maintained an investment-grade credit rating despite having nearly $110 billion of debt on its balance sheet.
Thus, Apple's decision to return cash to shareholders didn't mean that it had no cash left to invest in the various acquisitions and R&D projects Jackson thinks it should have pursued. Both decisions -- the decision to return cash to shareholders and the decision to not spend big on acquisitions or incremental R&D -- should be evaluated separately and on their own merits.
It's all about shareholder return
The real question Apple shareholders should be asking is whether or not dividends and share buybacks are boosting total shareholder return. On this front, it's hard to argue against Apple's dividend and stock buyback policy.
Based on its share count two years ago and the gradual addition of new shares due to stock option exercises, Apple was on pace to have nearly 6.8 billion diluted shares by now. But in the meantime, Apple spent $70 billion on share repurchases (including net-share settlement of stock options). As a result, it had fewer than 6 billion diluted shares as of last quarter.
By the end of 2015, Apple will likely have reduced its share count by about 15%. This will provide a 15% lift to Apple's EPS in perpetuity. It will have done so by buying stock at an average purchase price well below $100. Based on analysts' estimates for Apple's fiscal year 2015 earnings, the company's buybacks will add more than $1 in EPS this year.
On top of this, Apple has been putting about $11 billion a year into shareholders' pockets through its quarterly dividend. Apple's dividend doesn't help its stock price -- indeed, anytime a company pays a dividend, its stock price is automatically reduced by the same amount -- but that doesn't mean it's not valuable. Shareholders can reinvest this money in more Apple stock, or spend it on anything else.
Hard to call this a waste
Thanks to Apple's capital return policy, the company has a significantly higher EPS than it otherwise would. Shareholders are also benefiting from a steady stream of income.
Both of these benefits came at an extremely low opportunity cost, given the abysmal returns on Apple's cash and the low cost of issuing debt. Apple's decision to return $130 billion to shareholders by the end of 2015 has thus been anything but a waste of money.
Whether spending $100 billion on buying comparatively small companies with negligible earnings would have created value for Apple shareholders is less clear. Whatever the answer to that question, Apple's decision not to buy up companies like Tesla and Twitter has nothing to do with its commendable decision to start paying dividends and buying back stock.