Memo to Apple (NASDAQ:AAPL) CEO Mr. Tim Cook: Focus on generating long-term earnings and long-term free cash flows. Learn to enjoy and take advantage of short-term fluctuations in Apple's stock price in order to enhance long-term returns to long-term shareholders.
SeekingAlpha readers: What do you think of Apple CEO's Tim Cook's statement that " The decline in Apple's stock price over the last couple of quarters has been very frustrating to all of us."
Is not a temporary decline in Apple's stock price an economic positive for loyal long-term investors?
1. the lower the stock price, the more shares that long-term investors can purchase when they re-invest dividends
2. the lower the stock price, the more shares Apple can re-purchase. This ultimately leaves long-term investors that do not participate in the share re-purchase owning a larger portion of the firm.
Mr Cook, is there any reason you disagree with either of these statements?
Mr. Cook, please focus on generating long-term earnings and long-term free cash flows. Don't worry about short-term fluctuation in Apple's stock price. To the extent you do worry about the stock price, please hope it declines, so Apple ("the firm") can re-purchase more shares.
As a vivid example, please study IBM's (NYSE:IBM) share count decline from 2.0 billion shares in 1996 to 1.1 billion shares in 2012. This decline in the share count enhanced earnings per share and free cash flow per share by over 81% over this 16 year period, or 3.8% per year. IBM's stock price increased considerably, and all the while, long-term IBM investors also collected dividends that they could re-invested, further increasing their ownership stake in the firm.
Mr. Cook, please read Warren Buffet's (Berkshire Hathaway Inc's CEO) 2012 Letter to Shareholders. Perhaps ask him over for coffee or a Coke, or maybe a game of bridge (NASDAQ:MSFT).
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pages, 6 and 7
"This discussion of repurchases offers me the chance to address the irrational reaction of many investors
to changes in stock prices. When Berkshire buys stock in a company that is repurchasing shares, we hope for two
events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to
come; and second, we also hope that the stock underperforms in the market for a long time as well. A corollary to
this second point: "Talking our book" about a stock we own - were that to be effective - would actually be
harmful to Berkshire, not helpful as commentators customarily assume.
Let's use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano
did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today. Their
operational accomplishments were truly extraordinary.
But their financial management was equally brilliant, particularly in recent years as the company's
financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a
skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made
value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.
Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%.
Naturally, what happens to the company's earnings over the next five years is of enormous importance to us.
Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the
day: What should a long-term shareholder, such as Berkshire, cheer for during that period?
I won't keep you in suspense. We should wish for IBM's stock price to languish throughout the five years.
Let's do the math. If IBM's stock price averages, say, $200 during the period, the company will acquire
250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we
would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year
period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after
five years, of which we would own 6.5%.
If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100
million greater under the "disappointing" scenario of a lower stock price than they would have been at the higher
price. At some later point our shares would be worth perhaps $11⁄2 billion more than if the "high-price"
repurchase scenario had taken place.
The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own
money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks
rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including
those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble
a commuter who rejoices after the price of gas increases, simply because his tank contains a day's supply.
Charlie and I don't expect to win many of you over to our way of thinking - we've observed enough
human behavior to know the futility of that - but we do want you to be aware of our personal calculus. And here
a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben
Graham's The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock
prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one
of the luckiest moments in my life.
In the end, the success of our IBM investment will be determined primarily by its future earnings. But
an important secondary factor will be how many shares the company purchases with the substantial sums it is
likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will
abandon my famed frugality and give Berkshire employees a paid holiday."
pages, 6 and 7
Disclosure: I am long AAPL, BRK.B, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.