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Robert McDonald
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FROM INSIDE SILICON VALLEY: Sorting the truth or likely truth from the noise is a key attribute of the successful investor. My commentary is a distillation of some of this effort relative to particular stocks and investment areas. My publishing at this point in time is limited to the blogsphere,... More
  • Why Is Apple's Stock Buyback One Of Apple's Next Big Things? 0 comments
    Apr 29, 2013 10:59 AM | about stocks: AAPL

    Apple $60B share buyback plan is the largest ever in corporate history and represents 15% of the outstanding shares. Apple also far from the first reputable American company to borrow money in order to buy its stock back - see Microsoft and Cisco actions over the last several years.

    One of the next big things is how much money Apple is going make by buying its depressed stock back with borrowed money at the current low interest rates. The stock will appreciate way more than the interest paid and as an additional benefit, dividend payments will go down due to the reduced number of shares to pay dividends on.

    The very presence of a buyback is inherently likely to raise the stock price. If the stock float is reduced by 15%, there is that much less stock available for investors to buy. Given that you have the same number of investors who want to hold the same number of shares, this means that the price per share of stock will have to go up by 15%. Another way of saying this is that the stock will have to go up by 15% to maintain the same market cap due to the buyback alone. This ignores any benefit

    Interested investors may want to read this article from Saturday's Barrons which characterizes the new effective dividend rate as 8%. They get to number by assuming the buyback will be extended over the next 3 year authorization period. They submit that the effective increase in stock valuation caused by the buyback is equivalent to 5%/year and adding this to new the actual dividend rate you get to an effective 8% net gain per year:

    For Patient Bulls, Apple's Day Will Come Again
    http://bit.ly/14HBoRr

    Borrowing money to complete the buyback is much more tax efficient than repatriating offshore cash due to America' stone age tax system, especially at today's low interest rates.

    America's tax system unfortunately indirectly pays American companies not to bring cash home to fund US business expansions, new factories and new jobs. If an American company brings money home for any purpose, even investment in American jobs, they will be taxed on it whereas if the leave the money offshore, no taxes are due.

    On the good side of still having humongous amounts of offshore cash, Apple has lots of money to fund offshore retail stores, manufacturing operations, data centers etc.

    Disclosure: I am long AAPL.

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