Why Apple's Buyback And Dividend Plan Is A Disappointing Drop In The Bucket

| About: Apple Inc. (AAPL)

Long investors in Apple (NASDAQ: AAPL) have been waiting for the big announcement regarding potential uses for its $98 billion cash hoard and today we cannot help but be disappointed. Many will still argue that none of this really matters as long as Apple continues to innovate, but I, along with many of my fellow investors, strongly believe that doing a great job on the product front does not give management an excuse to ignore the capital allocation aspect of your responsibilities to shareholders.

Apple has announced a $10 billion stock buyback program and the initiation of a dividend of approximately $10 billion per year. Over the next three years it expects to return $45 billion to shareholders. On the face of it, this might seem like great news for shareholders, as it uses nearly half of the company's current cash hoard. However, that type of simple analysis completely ignores the free cash flow they generate each quarter.

Consider how much cash Apple has amassed over the last year. From December 31, 2010 through December 31, 2011, Apple's cash hoard grew from $60 billion to $98 billion. So their operations are generating free cash of around $40 billion per year, and yet the company just announced plans to distribute $45 billion to shareholders, in total, over a three-year period. You can see why I call this merely a drop in the bucket.

If Apple's free cash flow does not grow at all over the next three years (highly unlikely, of course), the company will generate $120 billion in additional free cash flow from product sales and will return $45 billion of that to shareholders. As a result, Apple's cash hoard will likely almost double from current levels over that time.

Tim Cook might try to argue that this is great for Apple shareholders on today's conference call, but the numbers simply do not back up those assertions. The market is reacting in a similar fashion. Apple stock was up $14 pre-market before the details of the plan were released, but those gains have now completely evaporated as investors have read the press release.

Disclosure: I am long AAPL.