Why Apple Needs To Buy Back At Least $4.5 Billion Per Year

| About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) has over $81 billion in cash and investments on its balance sheet, and many have been calling for them to use that money in a variety of ways. Some people prefer a dividend, like many other technology companies have started to do. Some prefer a buyback, as they don't want to see a "growth" company paying a dividend. Some are even calling for a major acquisition, but given Apple's history, that's not likely.

Now I've stated before that I don't think that Apple should pay a dividend. Not right now anyway. I'm not totally in favor of a buyback either, but if they were going to spend the money in any of the three ways I mentioned above, I'd be in favor of the buyback as my first choice. Now I've also stated that I'd like to see them hold onto the money and invest it. Although it's been stated that they are only earning about 1% on their money overall, if that's the case, they are earning $810 million pre-tax in pure profit. Not a ton when you consider they've made $26 billion in the past twelve months, but every penny counts I guess.

So here's a new reason for a share buyback. Stop the increase in their share count. Over the past couple of years, the diluted share count has grown, and probably at a rate that's more than you'd expect. Here are the numbers at the end of each calendar year, in millions (2011 number is end of September).

Year 2006 2007 2008 2009 2010 2011
Shares 883.297 900.054 901.494 919.783 933.154 939.517
Growth - 1.90% 0.16% 2.03% 1.45% 0.68%
Click to enlarge

Now, if we assume that the 4th quarter share count expansion is equal to the first three quarters of this year, we'll end the year with approximately 941.615 million shares. Over the five year period, that's a compound annual growth rate of 1.29%. Using the projected end for this year, that growth rate equates to an increase of about 12 million shares per year. At current prices, you're talking about over $4.5 billion in stock.

Now I don't know how Apple shareholders feel about this dilution, or how many of them realize the number is increasing. But that's okay. Because we all know that nobody likes share dilution. Just ask Netflix (NASDAQ:NFLX) shareholders after Monday's news. The company announced a $400 million convertible debt issuance, which if converted, would dilute current shareholders by more than 10%. Shares lost more than 5% Tuesday.

Now to be fair, Apple does get money when their share count increases. In fact, if you look at their cash flow statement, you'll notice that over the past 3 years, the company has increased cash by $2.218 billion dollars from "sale of stock". So where is that money going? Well, some of it is going to make those great products that you know and love. But some of it is also going to that massive cash pile that's earning just 1%, and diluting you at the same time.

Apple is eventually going to do something with all of that cash. They haven't yet, but the day is coming. It's just a matter of when. But when you start calling for a buyback, in the hopes of eliminating shares, just remember that they need to spend roughly $4.5 billion just to stop increasing the number of shares. If you want the share count to go down, they'll have to spend even more.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.