Tim Cook and Luca Maestri are literally buying back Apple shares as fast as they can. When comparing the pace of Apple buyback over the past six months to that of the program's previous three years, it is clear that management made the decision to be opportunistic to take advantage of Apple's languishing stock price. Apple management is showing an increasing level of confidence in its future.
While everyone quickly focused on iPhone unit sales growth guidance and clues about Apple Watch sales when Apple reported 4Q15 earnings last week, one data point that jumped out at me was the amount Apple spent on share buyback. Management bought more shares in the open market last quarter than any previous quarter. In fact, when looking at the past six months, including the most recent ASR (accelerated share repurchase program), Apple bought back $24 billion of its shares, which is a record for any six-month stretch. All of this is made even more remarkable when considering that Apple's stock price is more than 60% higher than when Apple began buying back its shares in late 2012. This shows management remains quite optimistic about Apple's future and value found in Apple shares at current price levels.
A closer examination of Apple's buyback activity is required to notice underlining trends. When looking at the pace of buyback on a very simple annual basis (Exhibit 1), nothing stands out from the ordinary. Apple has consistently repurchased shares since launching its repurchase program in late 2012, and it would appear that the pace of buyback slowed somewhat dramatically in 2015 due to a rising stock price and dwindling U.S. cash levels.
Exhibit 1: Apple Share Buyback (Annual - Fiscal Year)
However, if looking at the pace of Apple's share buyback on a quarterly basis, as shown in Exhibit 2, we arrive at a different conclusion as to how Apple has conducted its share repurchases. Apple's elevated pace of buyback over the past few months becomes apparent. As Apple's stock price declined this past summer due to a number of reasons including fears around slowing economic growth in China, Apple management increased its share repurchase activity. The $14 billion spent on share repurchases last quarter ranks as the fourth largest quarterly amount spent on buyback.
Exhibit 2: Apple Share Buyback (Quarterly - Fiscal Year)
However, looking at share repurchases on a quarterly basis still doesn't do the best job of explaining management's view on share buyback. The true extent of Apple's aggressive buyback activity only becomes apparent when looking at the pace of buyback on a trailing six-month basis, shown in Exhibit 3. This timeframe is able to capture management's changed attitude toward buyback this past summer. Over the past six months, Apple has spent more on buyback than any previous six month period.
Exhibit 3: Apple Share Buyback (Trailing Six Months - Fiscal Year)
When we look at Apple's stock buyback activity in FY2015, specifically the past six months, management's motivation becomes clear. As displayed down below in Exhibit 4, the yellow highlighted months (February, August, and September) represent the three busiest months in terms of management buying back shares in the open market. In FY2015, Apple spent $30B on share buyback in the open market, repurchasing 255M shares for an average selling price at $117.68. Looking back at the news flow from recent months, the pace of share buyback increased around the time Tim Cook emailed CNBC's Jim Cramer to say that business in China was holding up well. More interestingly, Apple maintained the pace of buyback through September up to the iPhone 6s and 6s Plus launch. These actions don't seem to come from a management team that is too worried about Apple's long-term trajectory.
Exhibit 4: Apple Share Buyback (Monthly Open Market Purchases in FY2015)
When thinking about the pace of future stock buyback, Apple's U.S. cash levels need to be addressed. The amount of cash held offshore cannot be used for share buyback (or quarterly cash dividends). I previously chronicled the dilemma this presents. Due to strong iPhone sales in China, Apple is earning more cash internationally than it can spend in the U.S. on share buyback and dividends. One near-term solution has been for management to issue debt in order to fund the capital return program. While this plan is not a long-term solution, it is likely the best near-term plan while management lobbies for U.S. corporate tax reform addressing repatriation tax on offshore earnings. In 4Q15, Apple issued $10 billion of debt to fund share repurchases in August and September (shown in Exhibit 5). This is the most likely reason why Apple didn't begin another ASR over the summer.
Exhibit 5: Apple Debt Issuance (Quarterly - Fiscal Year)
When looking at the pace of debt issuance, it is clear that Apple is only able to buy back its stock as fast as it can raise debt. Over the past nine months, Apple has issued $29 billion of debt while buying back $31 billion of shares. When taking quarterly cash dividends and Apple's routine cash needs into consideration, Apple is literally buying back shares as fast as it can.
While ASRs represent the quickest way to buy back shares, one requirement is to have the cash up front when the ASR is initialized, something that was likely not possible over the summer. Instead of beginning another "modest" ASR of a few billion dollars, Apple management likely wanted to be much more opportunistic with buyback. The second-best alternative was to issue debt across a number of weeks and then repurchase shares in open market transactions, buying a greater number of shares as the stock price continued to drop in August and September. In terms of open market purchases, highlighted in Exhibit 6, 4Q15 was the busiest month since Apple began its buyback program, exceeding the second most active quarter by 75%.
Exhibit 6: Apple Share Buyback (Quarterly Open Market Purchases - Fiscal Year)
When looking at the pace of debt issued and the resulting pace of buyback, I have doubts Apple management could have done much more to buy shares at a faster pace over the summer given the circumstances and share price. While Apple could have returned the $187 billion of foreign cash back to the U.S., paying the required tax on such funds would not be the most shareholder-friendly option. Stock buyback does not operate in a vacuum with management needing to weigh the costs of returning cash to the U.S. against raising debt.
It is important to remember that share repurchases, both open market and ASRs, are unable to keep Apple's stock price from declining in the future. There are a number of high-profile examples within the financial sector were management teams were buying back stock in 2007 and 2008 only to then need to raise capital in the subsequent recession as their companies encountered a more difficult operating environment. Instead, the main takeaway from Apple's buyback program is that management increased the pace of buyback as Apple's stock price declined nearly 30% from all-time highs. The striking aspect of Apple's buyback is how management is actually buying more shares as Apple's stock price increases. In 2015, Apple repurchased shares at a $118 average stock price, 25% higher than the average price paid in 2014. When looking back at 2013, Apple was buying shares at price levels that were 65% lower than the current stock price.
Tim Cook and Luca Maestri are likely becoming more confident in Apple's future when looking at iPhone's position in the smartphone industry. The ability to entice Android smartphone owners while serving as an aspirational brand causing consumers to strive to move up to iPhone's price layers represents a long-term positive. In addition, while this may be just a coincidence, Apple management increased the pace of buyback in February 2015, around the time reports came out depicting Project Titan and Apple's growing ambitions with electric cars. Then, over the summer, the increased pace of buyback once again seemed to correspond to new reports indicating new Project Titan hires and a WSJ report in September saying the project received the green light with a 2019 target. Management is now left with $36 billion of remaining share repurchase authorization with the board planning to update the capital return program in 2016. We are seeing a management team that is betting big on a future that the stock market is still unable to see.
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