Apple (NASDAQ:AAPL) has let its shares swoon from a closing high of $701.91 in mid-September to a recent low close of $420.05. Apple has appeared as no more than a bystander during the entire decline without giving shareholders a compelling reason to remain in the stock. This is a company who is a leader in the fastest growing markets with the best products, which trades at a 33% discount to the S&P 500's multiple while growing nearly twice as fast - but this is not enough in a market like this, where investors need constant reassurance to remain confident.
During the recent stretch of tough news (supply and demand issues, margin compression), Apple has let the market control the conversation about where it is heading, rather than taking charge of it. At the first sign of weakness, talking heads love to prognosticate about the demise of a market leader, and Apple has done nothing effective to stem the criticism. As a result of being so guarded about its future, the only tactic Apple has used is to roll out CEO Tim Cook to discuss in very abstract terms how amazing the innovations are in the back room and how he is discussing with the board how to improve shareholder value. It isn't working as he just isn't inspiring enough on his own. In a market where "price is truth," Apple has been a victim of a negative feedback vicious circle where a fading price erodes confidence and paints a picture of a dire future which in turn further drives the price down (the exact opposite case of Amazon (NASDAQ:AMZN) for example, where there is an unfounded positive feedback virtuous circle which creates misguided and false optimism of its future potential).
The good news is that Apple doesn't have to unlock any background secrets to get its stock back to $700. It has the two most powerful tools it needs in this fight - piles and piles of cash with the world's best free cash flow. Figure 1 displays the money flow during the run up in the stock from $420 to $702 and then back down to $420.
Figure 1: Apple Money Flow During its Run Up and Run Down
The run up from $420 to $702 took 169 trading days with $147.2 billion of money flowing into the stock on 3.1 billion shares. Average money flow per share was about $47. The run back to $420 was faster at 111 trading days and more intense with 14% more shares per day trading while average money flow per share was -$127. Total money flow out of Apple during the collapse was $294 billion, or 2x the amount of money poured in during the ramp up.
The large drop was not driven by or supported by shorts as short volume was 14.5 million shares on 9/14/2012 (1.5% of shares outstanding) and 18.5 million shares on 2/15/2013 (1.9%). Short covering will not drive the stock back up. Another curious point is the lack of significant reduction in shares during the December Quarter while the stock was dropping so far below fair value. While Apple did announce a $10 billion buyback program for FY2013, the plan according to the FY2012 10K was only to "neutralize the impact of dilution from future employee equity grants." In the December quarter, Apple issued $545 million in stock compensation (~ 1.0 million shares), while buying back 2.58 million shares (average price undisclosed). The share count remains 5 million higher than it did at the start of 2012 when the run up began. With 1 million shares per quarter being added from stock compensation, Apple needs to buy back another 8 million shares prior to end of the FY13 for share count neutralization, costing about $3.4 billion at today's price. That will leave only about $5B remaining in the stock buyback plan - not nearly enough to meaningfully impact the valuation. It's time for a little old fashioned shock-and-awe and put that $137 billion cash stock pile to work for shareholders.
My recommendation is for Apple to simultaneously announce they are increasing their share buyback program by an additional $90 billion to $100 billion in total (shock) while doubling their dividend (awe) to $5.30 per share per quarter (4.93% yield at $430). It took $147 billion of cash inflow to move the stock up nearly $272 last year, and the combination of these two actions/announcements will certainly have a similar impact. This program has the additional benefit of significantly reducing the share count by 15-25% depending on the average share price purchased, which will accelerate EPS growth during the period.
When this action is complete, Apple will still have $37 billion in net cash (plus any additional FCF during the period) and the doubled dividend will only account for about 40% of current free cash flow, leaving them with plenty of cash for acquisitions and future dividend increases.
Hard to imagine that anyone could be short Apple or considering selling now with the full retrace back to $420 complete, combined with the powerful cash tool Apple could execute on at any point to drive the stock significantly higher. This buyback and dividend plan will return confidence to shareholders and buy Apple time until its next major product release.