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.