After writing an article on Warren Buffett's view on stock repurchases, I wondered if Warren might have advised that Apple (NASDAQ:AAPL) do just that. Buffett's view is that it only makes sense for a company to repurchase shares if the company has the funds to do it, and if shares are trading at or below intrinsic value.
The irony, of course, is that if the company you own is repurchasing shares, you should be rooting for lower stock prices, not higher prices. Apple may or may not be "cheap," at various times, but shares are up 7-fold over the last 6 years while Berkshire Hathaway (NYSE:BRK.A) is only up 35%
But Berkshire Hathaway has generally kept its number of outstanding shares constant. You can't say the same about Apple.
Rising shares outstanding
Apple had about 850 million shares outstanding as 2006 began. Now there's about 930 million shares outstanding. If you've owned the stock since then, your holdings have been diluted. Why? I can't be absolutely positive, but many tech companies grant employees stock options that vest over time - and eventually, one hopes, exercised and shares issued.
As an investor, you might be a bit miffed to see that share count rise, but if you bought Apple at $100 to hold for the long term, would you want an Apple employee's 100-strike option to be deep in the money one day? Of course you would.
Buying back shares: A hypothetical look back
But let's say Apple had decided to mitigate whatever was diluting shareholders by buying back stock.
I made some assumptions - that back in early 2006 the company decided to keep its float at 850 million shares. That would mean the company would have had to use some of its cash to buy back stock.
Back in 2006, that might not have been a bright idea. Remember, that was before the company launched the iPhone. And the company's cash position was a lot lower than it is today. But I assumed that in each quarter, the company bought enough shares to keep the float at 850 million shares outstanding - using the midpoint between the stock's high and low in each month as the price paid.
I also assumed that taxation was not an issue, that there was enough post-tax money available to fund these stock purchases. That's probably the case today, but may not have been several years ago.
So if we fast forward to today, how much would Apple shares be worth?
That brings me to my last assumption - that the market would assign the same trailing PE ratio to the stock as it had since 2006.
Here's a look at what the actual share price and the projected share price if those PE multiples were the same.
It's kind of hard to see the difference over the longer time period, so here's a zoomed in view since 2010 when the results of the buyback would have been really paying off.
So today, a share would be worth $577 - about $55 more than Friday's close of $522.41
Bear in mind that if you did not hold Apple shares in 2006, you would not have benefited as much. For example, if you bought in early 2010, you would have paid $16 more per share for your stock if this hypothetical buy back program has been ongoing (and market multiples were consistent, of course)
A good use of capital?
This hypothetical scenario would be completely worthless if the company didn't have the cash to buy its stock back. And in the earlier part of the time period, it might have been a bit questionable.
As I was working through the numbers, I noted that there were some quarters where the company would have had to part with up to half of the cash it added to the balance sheet.
Just to be clear, I'm referring to new cash that was added to the balance sheet. In no quarter would the company have had to dip into its already existing cash. And in some more recent quarters, the percentage of new cash needed to purchase stock was 15% or even less.
And to further clarify, "cash" refers to cash, short-term investments, and long-term marketable securities.
This chart shows the cumulative price per share the company would have had to pay to keep its shares outstanding at a constant 850 million shares over that time period.
As of last quarter, the total the company would have paid over the period was about $200 per share. At some point, of course, it would not make sense to keep buying back shares, nor might it had made much sense at various times in the past depending upon your view of the stock's intrinsic value.
Reduced cash hoard: More value, same whining
Would Warren Buffett have approved? I'm not sure. But looking back, $200 per share for Apple seems bargain priced to me.
Of course, those share purchases came at a cost - about $16 billion over the time period - as shown on this chart.
I would have been okay with that, but consider this. It's so fashionable to hear some shareholders (or non shareholders for that matter) continually whine about the cash. The chorus goes something like this:
"$97 billion in cash?!?! You call that effective use of capital? Do something already!"
So if the company had done a buy back under my scenario, do you think the refrain would be any different? Not me. I think it would probably be exactly the same.
"$81 billion in cash?!?! You call that effective use of capital? Do something already!"
So while shareholder value might have been increased, $16 billion probably would have done little or nothing to quell the whining level.
Sometimes you just can't win.