- Apple doesn't have the ability to provide a price floor at $500.
- The sheer amount of capital required to move Apple stock constrains price appreciation.
- Cash-funded buybacks need earnings growth or multiple expansion to increase shareholder value.
Is There a $500 Floor From Buybacks?
Following the 1Q earnings, Tim Cook told the media Apple repurchased $14bn in shares as the price dropped below $500. Added to the repurchases in 1Q, this brings the total to $19bn so far in FY14, approaching its $22bn repurchased in FY13. This has led some to believe that Apple will be a buyer at $500 providing a floor for the share price, but is this a realistic assumption?
To make a determination on Apple's ability to establish a price floor, I wanted to compare Apple's buyback to the total dollar volume traded in Apple stock over the course of a year. Using volume data from Google Finance, Apple trades 10.3 million shares per day. At the current share price, that equates to $5.5 billion per day. There are approximately 250 trading days in a given year, so that means almost $1.4 trillion is needed to fund all the purchases over a 12-month period. Putting that into context, Apple's $20bn buyback represents ~1.5% of the annual demand for shares. To me, this seems to be too small of a number to provide a floor under the stock for any period of time. Given they have exhausted $19bn in buybacks so far this year, future price support from buybacks seems even lower.
Demand Needed to Drive Apple Higher
As mentioned above, at the current average volume, Apple needs ~$1.4 trillion over the course of a year committed to buying Apple stock to maintain the current price. The current market cap of the S&P 500 is over $17 trillion. I know a lot of investors will buy/sell Apple and other stocks numerous times over the course of a year, meaning this isn't an apple-to-apples comparison, but it is amazing that the annual dollar purchases of Apple represent 8% of the total market cap of the S&P 500.
By comparison, the total estimated yearly dollar investment into Google (NASDAQ:GOOG), Wal-Mart (NYSE:WMT), Exxon (NYSE:XOM) and Microsoft (NASDAQ:MSFT) combined barely exceeds what Apple alone requires. This does not mean Apple stock can't increase from here, but it does illustrate the sheer amount of capital that needs to be invested into Apple to move the stock in a meaningful way.
Reducing Shares and Cash/Investments
Buying back shares can be beneficial to shareholders when the company is growing earnings and/or benefiting from multiple expansion. One of those two things needs to be present, otherwise the company is merely transferring cash from the balance sheet (which equity holders have a claim on) and giving it to selling shareholders. Cash-funded buybacks in and of themselves have no value increasing capability.
Apple has almost $160bn in cash/investments according to the latest 10Q. We know they spent $14bn already on repurchases, but will likely generate $10bn or so in FCF during 2Q. For simplicity, however, I'm going to use the 1Q cash balance. Of the $159bn in cash/investment, $124bn is held overseas. Estimating a 25% tax liability associated with that cash leaves an after-tax cash balance of $128bn, or $143/share.
With a current share price of ~$530 and the cash value of $143/share, that implies the going-concern business is selling for $387/share. At $387 and almost $43 in '14E earnings, the business is trading at a 9x forward multiple. From a simple P/E standpoint, this only serves to bolster the argument that Apple is cheap, but that multiple has been consistent and I believe represents how the market as a whole values Apple's future growth prospects. I said in my earlier article that I think Apple has reached peak profitability, at least over the next few years. If net income is stagnant or declining in the coming years, boosting EPS through buybacks won't be enough to buoy the stock. The table below shows projected price assuming all cash is used for buybacks and the P/E multiple remains constant.
I stand by my original argument that Apple won't reach $700 again - at least for some time. They will have new products and the iPhone 6 or another future product could be huge. If that is one's view, then buying the stock here could make sense. I don't personally believe that will happen though, but reasonable people can disagree. Potential growth would be the only reason to buy Apple in my view and I just don't see that coming based on what I wrote in the prior article. Banking on the buyback program or Apple providing price support at $500 seem like questionable reasons to own the stock.