"Whether it is stocks or socks, I like to buy quality merchandise when it is marked down" - Warren Buffett
A couple of weeks ago, it was announced that consumer gadget giant Apple (AAPL) bought back $14 billion worth of its own stock over the preceding two weeks. In an interview cited by The Wall Street Journal, Apple CEO Tim Cook said the company was "surprised" by the 8% decline in its shares on Jan. 28, the day after it reported lower iPhone sales than projected and warned that revenue in the current quarter might decline from the same period a year ago. Mr. Cook said he wanted to be "aggressive" and "opportunistic," with the latest purchases bringing the total amount of stock bought back over the last 12 months to $40 billion. He added, "It means that we are betting on Apple. It means that we are really confident on what we are doing and what we plan to do. We're not just saying that. We're showing that with our actions."
While Apple’s cash pile is often a hot topic for debate amongst analysts, it seems that the company is taking to heart the famous quotation from the Oracle of Omaha. And just to state the obvious, Tim Cook knows Apple better than everyone, so it bodes well for Apple’s future that the 8% price markdown after the earnings announcement signaled an opportunity to buy what he believed to be quality merchandise aggressively. With all of the discussion surrounding the share repurchase, let’s put the $14 billion into perspective just to illustrate the boldness of the move.
Most are aware that Apple has the largest market cap of all U.S. companies at $460 billion. This is $50 billion or so more than second and third place ExxonMobil (XOM) and Google (GOOG), the former a company known for also consistently returning money to its shareholders via buybacks. According to data from FactSet Research Systems, in the twelve month period as of December 17, 2013, Apple repurchased $22.9 billion worth of stock. This means that in the two-weeks following the most recent earnings announcement, Apple bought back almost two-thirds the value of shares that it had purchased in the entirety of 2013.
Believe it or not, the $14 billion two-week binge was actually more than what all but three companies (excluding Apple) spent on buybacks all last year. ExxonMobil repurchased $17.9 billion, AT&T (T) bought back $15.5 billion and Pfizer (PFE) spent $15.2 billion. In fact, only 7 companies (excluding Apple) bought back as much as $7 billion. So while comparing the overall repurchase amount to the market cap of Apple seems to dwarf the value of the investment, $14 billion allocated to buying back stock is an enormous amount to spend in a one year period, let alone two weeks.
Another way to look at the $14 billion is to show some relative comparison’s to the value. For instance, the popular high-end retailers Coach (COH) and Ralph Lauren (RL) both have market caps close to the $14 billion mark. Even more interesting, former Dow Jones Industrial Average component Alcoa (AA) has a market cap of $13 billion and popular electronics retailer Best Buy (BBY), a company that happens to sell Apple products, has a market cap of $8.9 billion. In fact, there are actually 19 companies on the latest Prudent Speculator newsletter buy list (none of the four above companies appear) that have smaller market caps than the $14 billion repurchase, including videogame maker Activision Blizzard (ATVI), energy company Diamond Offshore Drilling (DO) and retailer Staples (SPLS).
In addition, according to a United Nations 2012 study, $14 billion is actually a greater amount than the Gross Domestic Product (GDP) of more than 80 countries. That's right, Apple returned more money to its shareholders through stock repurchases in two weeks than the value of goods and services produced in countries like Nicaragua, Namibia and Iceland in an entire year.
While share buybacks are not always the most prudent way for companies to spend their accumulated cash, the enormity of Apple’s cash situation gives us reason to believe that it was quite intelligent in how it chose to distribute this money. With new products on the way, the recent China Mobile deal having the potential to be a powerful earnings catalyst, and Apple’s valuation looking very attractive in a market where many stocks trade at rich multiples, AAPL remains a bargain by our way of thinking as our long-term Target Price is close to $750.
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Opinions expressed are those of John Buckingham, chief investment officer of Al Frank Asset Management, Inc. (AFAM). a division of AFAM Capital, Inc., and are subject to change without notice and are not intended to be a forecast of future events, a guarantee of future results or investment advice.
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