Give credit to Apple Inc. and its chief executive officer, Tim Cook, for getting serious about returning unneeded capital to shareholders. As for the details, some of them don’t seem well thought out.
The maker of iPhones and iPads this week said its board approved a sixfold increase in its stock-repurchase plan to $60 billion. Not long ago, even discussing the idea of large share buybacks was a nonstarter for Apple. Now that its stock has tanked, the company is acting like they are a must-do, no matter what else the future might bring. At about $408 a share, down 42 percent since its record high in September, Apple has a stock-market value of $383 billion.
“This is the largest single share repurchase authorization in history and is expected to be executed by the end of calendar 2015,” Apple said in an April 23 news release, the same day the company reported its first quarterly profit decline in a decade.
How could Apple be so confident it will spend the whole $60 billion by then? That’s hard to say. The company is under no obligation to complete the repurchase program, although it obviously wants the markets to believe it will. Apple’s statements this week suggested it would carry out the plan without regard to price, which should be the most important consideration of all.
Nobody knows what Apple’s stock will do next month or next year. Would Apple keep doing buybacks if its price-earnings ratio tripled? That would be a high-class problem to have if the P/E soared because of a rising share price, but not if the main reason was a plunge in profits. Either way, you have to think Apple would reconsider its plans, except Apple didn’t say what might cause its expectations to change. The stock now trades for a mere 9.8 times earnings for the past four quarters.
Berkshire Hathaway Inc., the conglomerate run by Warren Buffett, also used to shun buybacks. Like Apple, it, too, changed tacks recently. In 2011, Berkshire said it would begin repurchasing shares for as much as a 10 percent premium to its book value, or common shareholder equity. The company’s board raised the limit in December to 20 percent. (Berkshire had paid about $1.4 billion to buy back stock as of the end of last year.)
Unlike Apple, Berkshire provided well-defined parameters from the outset. The stock currently trades for a 41 percent premium to book, so investors have a clear understanding that Berkshire isn’t a buyer at today’s prices. The company has said it wouldn’t do buybacks if they would reduce Berkshire’s cash to less than $20 billion. It also has said it expects the program to continue indefinitely. There is no timetable.
Apple’s buybacks are part of a program to return $100 billion to shareholders by the end of 2015, including $11 billion of annual dividend payments. The company had $12 billion in cash and $133 billion of marketable securities as of March 30. About 70 percent of that was held offshore, which means the company would face a large tax bill if it repatriated the assets under current laws. Because of that, Apple this week said it plans to borrow money to help pay for returning capital to shareholders. The company has no debt now.
Criticisms of Apple’s disclosures may seem minor, compared to the important step the company is taking to bring some rationality to its capital structure. Apple doesn’t need $145 billion of cash and securities on its balance sheet earning next to nothing. No company does. Most of it belongs in the hands of shareholders who can put the money to better use.
That said, there’s little to be gained from creating long-range expectations that later might prove unwise to fulfill. Sure, Apple used wiggle words to describe its intentions. It also created a needless risk to its credibility in the event that circumstances warrant a change. The board would have been better off simply authorizing more buybacks and describing the conditions under which Apple would follow through with them. An Apple spokesman, Steve Dowling, declined to comment.
Plenty of technology companies, notably Dell Inc., have hurt themselves by repurchasing huge quantities of their own stock at inflated levels. (For more on Dell’s disastrous buybacks, see this excellent column from January by Floyd Norris of the New York Times.) If the shares stop looking like a bargain to Apple, it shouldn’t hesitate to quit buying them. Other methods for distributing capital, such as a large special dividend similar to the one Microsoft Corp. paid in 2004, might be a better option at some point.
Apple will have lots of chances to improve its transparency and better explain how it will execute its buyback plan. It should take a cue from Berkshire: The more detail, the better.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
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