Apple will announce an update to its capital return program next month (likely in conjunction with its 2Q15 earnings release). Earlier this week, I took a closer look at Apple's quarterly cash dividend. Turning to share buyback, I expect Apple's board to approve a $35 to $45 billion increase to the buyback program, bringing total authorization to $125 to $135 billion. With Apple stock currently trading at a 13x forward P/E multiple, management will continue to look at buyback as an appropriate way to return excess capital to shareholders. Assuming the share price remains in the current valuation range, Apple will likely continue buying back shares at a $45 billion/year pace.
Share Buyback Authorization History
Apple initiated the stock buyback in fall of 2012. In the subsequent two years, Apple's pace of buyback exceeded its own timeline. As shown in Exhibit 1, the initial $10 billion authorization had a three year horizon, but Apple had bought back $10 billion of stock within a few months. The same can be said for the year-end 2015 target for completing the $60 billion of cumulative buyback authorization announced in April 2013. Apple spent $60 billion on buyback a full year ahead of schedule.
Exhibit 1: Apple's Capital Return Program Updates
While some companies are notorious for announcing share buyback programs, only to never finish them, Apple would appear to be aggressively following its stated repurchase authorization. Management is showing confidence in the future product lineup as well as the belief that Apple's current share price remains attractive for buyback. Last year, the board announced a $30 billion increase in buyback authorization but not did provide a timeline for the buyback completion. Apple ended up buying back approximately $30 billion of shares since that time. By not providing any stated timeline for its authorization, the board may be giving management a bit more leeway to judge the proper pace of buyback given the stock valuation.
Estimating the Share Buyback Authorization Increase
Apple currently has $90 billion of cumulative buyback authorization, of which $17 billion was remaining as of December 27, 2014. For a better understanding of how much the board will increase buyback authorization, it is crucial to estimate how much cash Apple will have at its disposal for capital return.
Exhibit 2 highlights the main ingredients of cash for calendar year 2015. Even though Apple has $178 billion of total cash, only $20 billion was located in the U.S. at the start of 2015. Add in U.S. free cash flow and cash proceeds from expected debt issuances, and Apple will have approximately $75 billion of cash before taking into account share repurchases and dividends. Keep in mind, free cash flow already reflects payments made for acquisition of property, plant and equipment.
Exhibit 2: Projected Apple U.S. Cash - CY2015
Assuming Apple will spend $11 billion on share dividends, there will be approximately $65 billion of cash available for share repurchases in 2015. Since Apple entered 2015 with $17 billion of share repurchase authorization remaining, it is reasonable to assume some cash has already been used to repurchase shares in the first quarter, leaving approximately $50-$55 billion of cash for buyback. This range forms the basis for my $35-$45 billion authorization increase estimate. Apple would likely still have buyback authorization left at the end of 2015, in which case it would roll over to 2016.
There are three scenarios to look for in terms of Apple's share buyback authorization increase:
Scenario A: Increase authorization by more than $40B. An authorization increase of $40 billion or more would mean either that Apple intends to increase the pace of buyback or the board is willing to give management more leeway in determining the best time for buyback with the expectation that most of the program will occur in 2016. However, since management had indicated it would assess the capital return program each year, there may not be much sense for the board to give authorization with a 2-3 year time horizon as that would leave less room for an increase in subsequent years. Evidence would seem to support the view that the board (and management) continue to think short-term in terms of its buyback authorization.
Scenario B: Increase authorization between $30B and $40B. An authorization increase between $30 billion and $40 billion would be considered the middle ground, leading to a buyback pace similar to 2014.
Scenario C: Increase authorization by less than $30B. An authorization increase of less than $30 billion would signal that share buyback may be slowing, unless the board is preparing to authorize additional increases later in the year (unlikely). One reason this may be an unlikely scenario is that the board would want to build flexibility into the program in case of sudden stock price swings.
Exhibit 3: Apple Share Buyback Authorization Increase Scenarios
I view Scenario A and Scenario B as the most likely outcomes given the board's preference to give management a bit more share repurchase authorization in case of stock price opportunities. Given the current amount of cash in the U.S. and a slightly higher stock price valuation, a $35-$45 billion increase to Apple's share buyback authorization is the most likely outcome next month. In such a scenario, Apple's cumulative share buyback authorization may reach $135 billion.
This report was produced by Neil Cybart on March 27, 2015 and is not meant to be used as investment advice.
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