We always say that we like companies that serially buy back their shares. This is because as the number of shares outstanding decreases, investors do not have to do anything to earn built-in returns and hold larger and larger shares of the companies. Apple’s latest $110 billion stock repurchase authorization is the largest of all – the largest in the company’s history. Apple has a long history of massive buyout plans. Assuming an average annual buyout of $100 billion per Club name, we wanted to assess the value of this buyout to shareholders. But first, let’s set the table. Last week, Apple announced an unprecedented buyback as well as second-quarter fiscal 2024 results, which showed concerns about iPhone sales and China weakness were overblown. With more records set for its installed base of active devices and services in the second quarter, Apple stock rose nearly 6% on Friday, the session following Thursday evening’s release. Apple also ended the quarter with approximately $162 billion in cash, equivalents and marketable securities on its balance sheet. Apple’s net cash was about $58 billion after debt. The net cash position is important because Apple aims to be net cash neutral over time. This is a fundamental tenet of our investment thesis, because it means that excess cash generated by the company each quarter will return to shareholders through buybacks and dividends. Apple relies more on the buyout side of capital returns. One of the criticisms bears make of Apple is often that the stock price is too high given its revenue growth rate. We oppose this, believing that what Apple lacks in revenue growth, it more than makes up for in ecosystem strength and customer loyalty, providing a deep competitive gap characterized by competitive costs. change and high pricing power. All of this fuels Apple’s immense and resilient cash-generating machine. We also believe revenue could surprise to the upside in coming years as artificial intelligence is increasingly integrated into devices, driving upgrades, and form factor and price of Vision Pro decrease, which will catalyze a new category of products currently in its infancy. . To simplify the math, let’s consider what Apple’s cash generation means for investors assuming no revenue growth or margin expansion. The fiscal 2024 revenue estimate of approximately $387.5 billion, which includes the two previously reported quarters, with a net profit margin of 26.1%, results in net income of approximately 100 .62 billion dollars. Divide that amount by the approximately 15.54 billion Apple shares outstanding and you get an earnings per share (EPS) estimate of $6.48. At a valuation of 28 times earnings, we arrive at a share price of around $182 each, right around where it was trading on Wednesday. To understand the dynamics of a profit-driven buyback, let’s keep these numbers static, assuming Apple continues to generate $100.62 billion in net profit while repurchasing $100 billion worth of stock each year. What we find is that the buyback alone increases earnings – and, therefore, the stock price at a rate of almost 3.7% per year. This is a function of removing shares and dividing the net profit by a lower number of shares. That hypothetical 3.7% isn’t exactly the most exciting return in the world, but no one expects Apple to stand still. We also ran the numbers with a combination of share repurchases and operational improvements and found an expected five-year compound annual growth rate (CAGR) of around 8.5%. Add to that an annual dividend yield of 0.55% at the current stock price of $182 per share, and that brings our total annual return calculation closer to 9%. In reality, this figure would probably be even higher, as this dividend is expected to increase every year. So why not just own an S&P 500 index fund, which has historically generated a total return greater than 10% on average? We’d say the estimates for Apple could turn out to be conservative, and here’s why. Apple could likely make stock repurchases in excess of $100 billion on average in the coming years if cash flow estimates pan out. Current estimates call for free cash flow growth from around $100 billion in 2023 to $140 billion by 2029 (year 5 in our analysis) – note that it is also expected that Apple generates more free cash flow than revenue going forward. The company should be drowning in cash, which will be used to gobble up shares for the benefit of long-term patient shareholders. We don’t think the potential of the Vision Pro, especially as the price and form factor drops, will be appreciated on the street, any more than the potential for faster hardware refresh cycles with improved devices AI. Apple’s ecosystem and brand loyalty, along with its fortress-like balance sheet, make it less risky than the average stock, which is what you get with an index fund. This view that Apple is a safe-haven name – coupled with our view that the potential benefits resulting from AI, Apple’s vision of “spatial computing” with Vision Pro and the growth of services that it can fuel – leads us to consider risk. /reward as very attractive. After all, while Apple has nearly $60 billion in net cash on its balance sheet and generates more than $100 billion in free cash flow annually, the company doesn’t need a rate environment low interest rate to invest in growth. Apple controls its own destiny. Not only can Apple weather a variety of business cycles and economic storms, but it is also able to profit from the pain of others and emerge stronger from it. This has been the Apple way. We’ve seen this year after year and see no reason to think it will change anytime soon. (Jim Cramer’s Charitable Trust is long AAPL. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY OBLIGATION EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
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We always say that we like companies that serially buy back their shares.
This is because as the number of shares outstanding decreases, investors do not have to do anything to earn built-in returns and hold larger and larger shares of the companies.
AppleThe latest $110 billion stock repurchase authorization is the oldest of all – the largest in the company’s history. Apple has a long history of massive buyout plans. Assuming an average annual buyout of $100 billion by the Club name in the future, we wanted to determine how much value this is worth to shareholders.
But first, let’s set the table.
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