Why Tim Cook Should Announce A Massive AAPL Share Buyback Immediately

Oct.11.11 | About: Apple Inc. (AAPL)

Last week was quite a week for Apple (NASDAQ:AAPL). The disappointing iPhone 4S announcement was followed by the sad news that Steve Jobs had passed away. Investors are clearly wondering what a post-Jobs, Tim Cook-led Apple will look like. Will the company be able to keep its winning streak alive in the consumer electronics market?

At least for now, there is little reason to think Cook will not be able to continue to grow Apple and maintain its leadership position. Apple's internal development schedule is surely already mapped out for the next several years, so any diminished ability of the company to anticipate consumer trends without Jobs will not be visible for at least several years, if it ever is at all.

Tim Cook is in a tough spot, being that nobody could ever fill Jobs' shoes. Accordingly, I believe he must continue to be himself leading Apple and not be afraid to do certain things a little differently. More specifically, I would suggest that Cook reevaluate the company's capital allocation strategy, on behalf of Apple shareholders all across the globe.

Many may think it is too soon after Jobs' passing to start thinking about the stock price or shareholder value creation, but I believe it is the perfect time to make a statement about Cook's confidence in the future of the company, which I have no doubt is bright.

The only fair criticism of Jobs and his top brass while running Apple was that he hoarded cash unnecessarily. As of June 30th, Apple had no debt and a whopping $76 billion of cash in the bank, which was earning next to nothing. Analysts have long agreed that holding $20 or $30 billion for R&D and strategic acquisitions was quite reasonable, but that this level of cash hoarding is a huge disservice to investors.

If I were Tim Cook, I would pivot from the Jobs philosophy in this one minor respect. The iPhone 4S release was met with some disappointment and the company's future is more uncertain now than in many, many years. What better way (and time) for Cook to start making his own, small mark as Apple CEO by announcing that the company is finished hoarding cash and instead is going to implement a massive share repurchase program? Cook should get the Board's permission to buy back 10% of the company's outstanding shares. This would require less than half of the company's cash balance, leaving it with a still-staggering $40 billion in the bank.

Doing so accomplishes several things. One, it gives shareholders confidence that Tim Cook is willing to give a nod to his shareholders, not only by creating great products that are immensely profitable, but also by maximizing the value of the company's stock, something prior management was unconcerned with. Two, it sends a strong signal that Cook and the Board are supremely confident in the succession plan Apple has put into place, as well as their development pipeline of new products. They can appeal to shareholders by using the events of recent days to try and quell their concerns. The buyback program would get the stock moving up again, exude confidence, and show that Tim Cook, while certainly not able to replace Steve Jobs in totality, is willing to do new things and make his own mark on the company.

Now, I do not expect we will see this type of announcement (calls for a dividend appear to be louder, although that would be taxable to shareholders, unlike a buyback), but I still think it is not only worth suggesting, but the best option. Something similar should have been done long ago, but on some level today seems to be the most logical time to make such a statement about Apple's future.

Disclosure: I am long AAPL.