Apple's $50 Billion Buyback Won't Dent its War Chest

The brain trust at Apple on Tuesday announced plans to repurchase $50 billion worth of the company's stock. This buyback -- due for completion by the end of 2015 -- combined with a bump in the dividend, increases the amount of cash Apple is "returning to shareholders" to $100 billion. The folks in Cupertino are doing this, of course, because Apple's burgeoning cash coffers are continuing to overflow, having reached $147 billion. So would it be surprising to learn that by the end of what CEO Tim Cook called a "record" buyback, Apple will almost certainly have even more cash than it does today? And given that, does it mean there's still more to Apple's long-term strategic plan that remains a secret for now?

Buyback by the numbers

With $50 billion added to the previously announced buyback, Apple has most of $60 billion to spend and 11 quarters to spend it. That's about $5.3 billion per quarter given what they've already repurchased. On top of that, Apple will spend $2.75 billion on dividends after the increase goes into effect. Put that together and you have a figure that is just north of $8 billion per quarter, assuming 100% of the buyback funds even get spent. In the most recent quarter, Apple added $7.6 billion to its cash balances, which would seem to be a bit less. But keep in mind, they've been paying a $2.5 billion dividend already and spent a good chunk of $2 billion in share repurchases during the quarter. In other words, absent these actions, the net cash would have grown by at least $11 billion this past quarter.

What that all adds up to is that in a quarter like the one we just saw, Apple still would have had a net cash gain of about $3 billion, even if the new capital plan was in effect. You can look at that quarter a couple of ways. On the one hand, it was typical, but profitability was down versus a year ago. That trend seems likely to continue into this quarter at least. On the other hand, Cook referred to entirely new future products, not to mention typical product refreshes to iPhone and iPad. In other words, Apple is likely to make greater profits than we just saw in quarters ahead.

Conservatively, it seems reasonable to suggest Apple will produce at least $2 billion more in cash each quarter than it will spend in dividends and share buybacks through the end of this program. That's north of $20 billion and could swell the cash balance to $170 billion or more by the time all is said and done. ($200 billion isn't out of the question)

So what next then?

At least three intriguing questions remain given this situation.

What happens if the share price rises meaningfully during the buyback period? I've made no secret of my distaste for buybacks and I'll revisit that topic in a future piece, but one thing that even Warren Buffett -- considered the guru of them -- will tell you is: “The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another.” The Oracle of Omaha argues that when your stock is cheap and you have no other need for the money, share repurchases are your best bet. Apple's stock certainly fits the bill -- today. But if it rebounds to $600 next year is that still true? Cook would have done shareholders a service had he made it clear the buyback would be suspended once the stock isn't cheap. Not doing this now risks a suspension later that tells the market Apple believes its own stock is expensive. Or worse, it has Apple buying back its shares at too high a price just to avoid sending that signal.

How much debt is Apple going to take on? The company plans on borrowing for the first time because much of the cash it needs to do everything it plans here is subject to a 35% tax if brought back from overseas. On top of that, debt is tax advantaged. Apple seems likely to borrow $10-20 billion and has received a slightly below AAA credit rating. If it borrows out 10 years, the interest payments on $10 billion would be just $300 million. Whatever bonds the company sells will leave the other cash free for something....

What else is there? By the time Apple crossed $50 billion in cash reserves, it could be argued it was well beyond any "rainy day fund" amounts. It now sits at three times that. Nothing the company has done or announced, from the new corporate campus to capital spending will do anything more than trim that total. Apple could, in fact, pay all of its workers 100% of their salaries for close to 10 years even if it never sold another computer or smartphone. As Peter Oppenheimer, Apple’s chief financial officer, said: "We continue to generate cash in excess of our needs to operate the business, invest in our future, and maintain flexibility to take advantage of strategic opportunities." For the moment, those opportunities remain a mystery.

Coming Soon: Speculations on how to spend $100 billion

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