Apple Is on Track to Buy Back 20% of Itself by 2017

Apple is sitting on $178 billion of cash. What does Apple plan to do with its excess cash? It looks increasingly likely that Apple has already given us the answer: repurchase shares. Apple will most likely revise its capital return program in April, raising its share buyback authorization and quarterly cash dividend payout. Assuming Apple relies on U.S. free cash flow and debt issuance to fund share buyback over the next three years, Apple is in a position to spend $150 billion on share buyback, repurchasing another 20% of its outstanding shares by 2017. 

Apple raised a small amount of debt last quarter, bringing total long-term debt held on the balance sheet to $32 billion at the end of December. Apple has since raised another $8 billion of debt in 2015, bringing the total amount of debt issued to $40 billion. Net cash (gross cash minus debt) stood at $142 billion ($24/share) at the end of December, depicted in Exhibit 1. 

Exhibit 1: Apple's Cash, Cash Equivalents and Marketable Securities

From a foreign cash perspective, Apple now has a $158 billion war chest. Due to strong holiday iPhone sales, Apple's U.S. gross cash (cash and debt) increased last quarter to $20 billion, despite continued share repurchases. 

Exhibit 2: Apple Gross Cash - U.S. Versus Foreign

As a reminder, Apple can not use its foreign cash to buy back shares or pay dividends without incurring tax penalties. Instead, Apple must rely on U.S. cash. With only $20 billion of U.S. cash remaining, Apple needs to tap the debt markets and rely on U.S. free cash flow (FCF) generation to fund additional share buyback. In Exhibit 3, I estimate Apple's likely U.S. FCF generation over the next three years and possible debt issuance loads ($25 billion a year as yields remain low). 

Exhibit 3: Apple's Capital Sources for Capital Return Program

Apple will kick off approximately $45-$50B a year in U.S. excess capital (including debt) over the next few years which can be used to fund the capital return program. Running with $50B a year in share buyback, shown in Exhibit 4, Apple would be in a position to have bought back 18% of its outstanding shares by 2017. 

Exhibit 4: Potential Apple Buyback Scenario

Apple began buying back shares in 2013. If Apple continues the current pace of buyback through 2017, the company would have bought back approximately 30% of the company, meaning roughly one out of three AAPL shares that existed in 2012 would have been bought back by the company. Going forward, management will continue to judge the value of share buybacks by comparing P/E and P/CF metrics versus other uses for cash such as special dividends and organic growth opportunities.  As seen in Exhibit 5, assuming Apple maintains the pack of buyback around $50 billion a year, Apple will spend $150 billion in buyback over the next three years, versus $68 billion spent on buyback in 2013 and 2014 combined. Apple will likely be able to raise the quarterly cash dividend each year, but the lower share count will result in only a modest increase to divided expense. 

Exhibit 5: Expected Apple Capital Return Program Expenditures

The wild card in this discussion remains AAPL stock price. A higher stock price will make share buyback less attractive, resulting in Apple buying back fewer shares. Conversely, a lower stock price would represent an attractive opportunity for Apple to ramp up its share repurchases. Even after three years of aggressive share repurchase activity and paying quarterly cash dividends through 2017, Apple would have more than $225 billion of gross cash remaining on its balance sheet. 

This report was produced by Neil Cybart on February 20, 2015 and is not meant to be used as investment advice. I publish a daily email about Apple called AAPL Orchard. Click here for more information and to subscribe.