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Apple (NASDAQ:AAPL) recently announced a major increase in its share repurchase plan, plus increased its dividend payout by 15%. We are going to take a look at how that will affect future EPS as well as the value of the stock.

Size of the Share Repurchase Plan

Apple has authorized up to $60 billion in share buybacks by the end of 2015. For simplicity's sake, we will assume that it will finish the share buybacks by the end of its 2015 fiscal year, which ends in September 2015.

Apple had 946 million outstanding shares at the end of Q2 FY13. Let's assume that this would naturally increase to 970 million by the end of FY15. The below table looks at how many shares $60 billion can repurchase at various average price levels.

Average Repurchase Price

Shares Repurchased (Million)

Remaining Shares
(Million)

$375

160

810

$400

150

820

$425

141.2

828.8

$450

133.3

836.4

$475

126.3

843.7

$500

120

850

For the rest of the calculations, we're going to assume that Apple pays an average of $450 for its repurchased shares. That is an 8% premium to the closing price on April 26, and allows for some appreciations as it does its repurchases. At such a price, it would be able to repurchase 133.3 million shares, about 14% of the total shares outstanding.

Effect of the Share Repurchase Plan on EPS and Valuation

In a previous article, we looked at Apple's expected earnings under a reasonably pessimistic scenario. This scenario included slow revenue growth from the key iPad and iPhone segments, as well as significant decreases in gross margins for those segments amidst heavy competition.

FY 2012

FY 2015

Segment

Gross Margin %

Revenue ($ Million)

Gross Margin ($ Million)

Gross Margin %

Revenue ($ Million)

Gross Margin ($ Million)

iPhone

58%

$80,477

$46,797

40%

$107,115

$42,846

iPad

33%

$32,424

$10,697

20%

$49,313

$9,863

Mac

28%

$23,221

$6,502

25%

$23,221

$5,805

iPod

28%

$5,615

$1,572

25%

$3,448

$862

Music, Software, service, and other

20%

$11,993

$2,399

20%

$18,240

$3,648

Peripherals

25%

$2,778

$695

20%

$4,225

$845

Total

44%

$156,508

$68,662

31%

$205,562

$63,869

Here's what such a scenario would look like in terms of FY 2015 EPS after the share repurchases, assuming that operating expenses were 8% of revenue, and a tax rate of 26%. This represents a slight decline versus FY 2012 EPS of $44.15.

FY 2015

Gross Margin ($ Million)

$63,869

Operating Expenses ($ Million)

$16,445

Other Income ($ Million)

$800

Income Before Taxes ($ Million)

$48,224

Taxes ($ Million)

$12,538

Net Income ($ Million)

$35,686

Outstanding Shares (Million)

836.4

EPS ($)

$42.67

In such a scenario, with $60 billion spent on buybacks and $12.20 per share in annual dividends, we'd expect Apple to have around $140 billion in cash and marketable securities remaining at the end of FY 2015. This translates into $167 per share with the reduced number of shares outstanding.

What Is Apple's Long-Term Price Floor?

If we use a value of 8x Apple's EPS and then add 75% (after taxes) of the $167 per share in cash and marketable securities, we'd get a value of $467 per share. At that price, the yield would be 2.6% from the $12.20 in dividends. This is a similar yield to when Apple was just over $400 with the previous annual dividend payments of $12.20.

For Apple's share price to stay below the $467 mark for a significant amount of time after the buybacks would require the belief that Apple cannot stay competitive. If Apple can remain moderately competitive, even with slow revenue growth, and sacrificing some margins to get to that revenue growth, it should be worth at least $467 per share.

What If There Are Slower Margin Declines?

I've taken the above scenario and increased Apple's FY2015 margins on iPhones and iPads by 5% each. This still represents a slight decline over current levels.

FY 2012

FY 2015

Segment

Gross Margin %

Revenue ($ Million)

Gross Margin ($ Million)

Gross Margin %

Revenue ($ Million)

Gross Margin ($ Million)

iPhone

58%

$80,477

$46,797

45%

$107,115

$48,202

iPad

33%

$32,424

$10,697

25%

$49,313

$12,328

Mac

28%

$23,221

$6,502

25%

$23,221

$5,805

iPod

28%

$5,615

$1,572

25%

$3,448

$862

Music, Software, service, and other

20%

$11,993

$2,399

20%

$18,240

$3,648

Peripherals

25%

$2,778

$695

20%

$4,225

$845

Total

44%

$156,508

$68,662

35%

$205,562

$71,690

As a result of the gross margin improvement over the previous scenario, total net income increases by around $6 billion. As well, cash and marketable securities should increase by about $10 billion by the end of FY 2015.

FY 2015

Gross Margin ($ Million)

$71,690

Operating Expenses ($ Million)

$16,445

Other Income ($ Million)

$800

Income Before Taxes ($ Million)

$56,045

Taxes ($ Million)

$14,572

Net Income ($ Million)

$41,473

Outstanding Shares (Million)

836.4

EPS ($)

$49.59

If we use a value of 8x Apple's EPS and then add 75% (after taxes) of its $179 per share in cash and marketable securities, we'd get a value of $531 per share. Bumping up that multiplier to 10x EPS would get us to $630 per share.

What If There Is A Successful New Product?

This scenario assuming the relatively stable gross margins from the scenario just above, and adds a new product line. This new product line (labelled as Product X) is given the revenues and gross margins of the iPad.

FY 2012

FY 2015

Segment

Gross Margin %

Revenue ($ Million)

Gross Margin ($ Million)

Gross Margin %

Revenue ($ Million)

Gross Margin ($ Million)

iPhone

58%

$80,477

$46,797

45%

$107,115

$48,202

iPad

33%

$32,424

$10,697

25%

$49,313

$12,328

Mac

28%

$23,221

$6,502

25%

$23,221

$5,805

iPod

28%

$5,615

$1,572

25%

$3,448

$862

Music, Software, service, and other

20%

$11,993

$2,399

20%

$18,240

$3,648

Peripherals

25%

$2,778

$695

20%

$4,225

$845

Product X

25%

$49,313

$12,328

Total

44%

$156,508

$68,662

33%

$254,875

$84,018

Since operating expenses are pegged at 8% of revenue, the new product line causes operating expenses to increase further. Assuming the product is launched in early to mid calendar year 2014, Apple's cash and marketable securities could increase to $190 per share.

FY 2015

Gross Margin ($ Million)

$84,018

Operating Expenses ($ Million)

$20,390

Other Income ($ Million)

$800

Income Before Taxes ($ Million)

$64,428

Taxes ($ Million)

$16,751

Net Income ($ Million)

$47,677

Outstanding Shares (Million)

836.4

EPS ($)

$57.00

If we use a value of 10x Apple's EPS and then add 75% (after taxes) of its $190 per share in cash and marketable securities, we'd get a value of $713 per share.

Conclusion

If you believe that Apple is going to remain at least moderately competitive, then Apple is currently undervalued.

The effect of the share repurchases plus increased dividend should put a long-term floor under Apple, and this floor is around $467 per share. This is a scenario where Apple faces slow revenue growth and declining margins, but doesn't completely implode.

In more optimistic scenarios such as slow revenue growth and mostly stable margins, then Apple could be worth $630 per share. With a new product line, Apple's value could be boosted to over $700 per share.

As long as Apple remains one of the two main players in the smartphone and tablet markets, then the current stock price represents an attractive opportunity with some significant upside.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Apple: A $467 Price Floor Set By Share Repurchase Plan And Dividend Hike