Apple’s Best Option Is To Initiate A Share Repurchase Plan
It must be nice to be Apple (AAPL). Seemingly their biggest problem seems to be where to put their burgeoning cash reserves. At last check they had about $97 billion worth of the ol’ greenback sitting around earning less than 1% in this low interest rate environment. Like mold on my son’s bath toy, this cash horde should grow to a whopping $146 billion over the next twelve months. So what is Apple to do to maximize shareholder value?
The most frequent comment we hear is that they will pay a cash dividend. There is probably some truth to that. However, this wouldn’t be the best use of their capital since we believe Apple shares are currently worth $875 and that intrinsic value goes up every quarter.
Apple’s best option is to initiate a share repurchase plan. We figure they will still want to keep a measly $40 billion around for the occasional acquisition (Greece perhaps?). This leaves Apple with $100 billion to repurchase shares. We assume they will pay around $650 per share, on average, to buy back about 154 million shares, dropping their total share count to 784 million fully diluted. Under this scenario Apple adds an incremental $127 to their share price.
It is fair to say we will be talking about Apple approaching $800 per share in twelve months, especially if they return cash to shareholders. At least that $100 billion dollars will be earning more than Uncle Sam is paying them, regardless of whether or not it is paid out in the form of a dividend or share buy back. One thing is for certain – if they pay out a cash dividend, reinvest it in the cheapest, high-quality stock, that everybody knows about…Apple.
Disclosure: I am long AAPL.
