Billionaire activist investor Carl Icahn tweeted on Tuesday morning about his dinner with Apple's CEO Tim Cook. Carl Icahn had continued to put pressure on Tim Cook for a $150 billion buyback of Apple's (NASDAQ:AAPL) shares. Although the two did not come to any agreement, they have promised to continue their discussion in the next few weeks.
In a CNBC interview, Carl Icahn explains that a stock buyback for Apple was a "no-brainer" and it "makes no sense" not to do so, given that the company trades at such low multiples. Icahn explains that the current low interest rate environment means that it is a "golden opportunity" to fund such a large scale buyback, and that this opportunity is not going to stay around forever.
Icahn explained that he invested into Apple because it was so cheaply valued on an ex-cash basis. With a $150 billion buyback, Apple would be valued at an extremely low PE multiple of just 7.8 times; and at a multiple on expected operating cash flow of 5.8 times.
Although much of the cash stockpile is located overseas, and repatriation would lead to a huge tax bill, the company could raise debt by "offsetting" its offshore marketable securities to obtain a low cost of funding. Furthermore, the $150 billion stock buyback would leave the company with virtually no net debt. In April 2013, Apple priced its 10-year notes at just 75 basis points above similarly dated Treasuries. Although yields on 10-year Treasuries have already risen by almost a percentage point since, interest rates are still historically very low.
Without any expectation of using the cash, Apple has invested in long-term marketable securities, including U.S. Treasuries, corporate debt, and mortgage-backed securities. These investment securities had a weighted average interest rate of "1.03%, 0.77%, and 0.75% during 2012, 2011, and 2010, respectively." It is enormously destructive to shareholder value for these investments to generate such pitifully low returns. The usual defense for this practice has been to 'save it for a rainy day', but Apple already has sufficient cash flow to fund new product developments and any acquisitions it would consider undertaking; and if not, it could always go to the capital markets for funding and justify its case to outsiders.
Apple has already announced that it intends to return $100 billion to shareholders by 2015, but many shareholders are, perhaps rightfully, not satisfied that this goes far enough, given the size of company's long term marketable securities portfolio. Although Tim Cook has generally been much more receptive to shareholders' concerns over the use of the company's cash stockpile than his predecessor, Steve Jobs; it remains unclear over whether he would bow down to shareholder pressure. Icahn said on CNBC: "I can't promise you the stock will go up and I can't promise you they will do the buyback. But I can promise you that I'm not going away until they hear a lot more from me concerning this."
While Carl Icahn's call for greater return of capital to Apple's shareholders is not new, continued pressure from reputable activist investors, including David Einhorn, should make the merits of greater shareholder redistributions clear to Apple's management. The ability to obtain funding for a massive stock buyback at the currently low interest rates is not likely to stay around for much longer, and these conditions have been historically extremely rare. Apple's currently low valuation multiples further strengthens the case that the timing for such a buyback is unlikely to get much better.
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.