As you all know Apple (AAPL) has a new dividend and share repurchase program. This is a significant step as Apple begins to generate more cash than available opportunity for reinvestment. The dividend may well entice dividend growth investors while Apple's product innovation should continue to placate growth investors at the same time.
In the middle of all this fan-fare there was one aspect that I didn't view as positive and it was the share repurchase program of $10 billion dollars over 3 years. Some feel that this is a great move as Apple shares are undervalued and the buyback will increase shareholder value. Is that really the case in this instance? Tim Cooks comments:
"The board has authorized the repurchase of $10 billion of stock over the next 3 fiscal years with the primary objective of neutralizing dilution from future grants through Apple's employee equity programs."
In short, don't get excited about the share repurchase program, as they have laid it out, any more than if they announced that no employee share dilution would take place but they would dip directly into the cash pile for $10 billion dollars for bonus payouts. In fact, there may very well be a savings to shareholder by not having the cost of these employee equity programs if they funneled cash directly to employees without the extra steps.
Share Buybacks and Employee Options
Apple claims they want to "neutralize" dilution from future grants with the repurchase program. But does neutralizing dilution mean they are neutralizing the consequences of issuing employee options? No. Whether Apple buys back shares or not is immaterial - shareholders must pay the $10 billion dollars either way.
Either you have share dilution while keeping your cash per share, or you have no dilution while giving away the cash per share. Issuing employee stock and they buying back shares is a two-step program instead of removing cash directly from the company and handing it to the employees. I am not against giving Apple employees their share of $10 billion dollars but why go through the trouble of adding layers of complexity and cost?
Perhaps the answer is a psychological one. Would announcing $10 billion dollars of company bonuses over 3 years seem worse than announcing a $10 billion dollar dilution/buyback program? They have the same net effect so both plans should be met with the same investors response.
There is the argument that the act of buying back shares drives prices up. This is true. But if $10 billion dollars of equity is removed from the company, valuations will drop as prices are artificially propped up through a buyback program. If the buyback is only to neutralize dilution, then the announcement should have the net effect of dropping prices by over $10 per share to account for the removal of equity. Any rise in share price associated with this share buyback plan (as it sits today) is not based in fundamentals but is purely a technical consequence of having to buyback shares on the open market.
How to Use the Cash
I need to be perfectly clear on these issues: Apple is a good company with good growth prospects and a great product. I agree that employees deserve bonuses. Share buybacks can be a good way to give back to shareholders. My point is that $10 billion in equity is about to be removed from Apple and share prices need to reflect this over time. While Apple is neutralizing dilution they are not neutralizing the loss of $10 billion in incentive programs. The net effect of this buyback - although small when looking at Apples bigger picture - is to push prices up and away from fundamentals.
As well, the announcement also included a dividend-equivalent to be paid to unvested restricted stock units. That is generous of Apple toward its employees. Well, I guess Apple is finally finding the answer of what to do with its cash pile after all.