We at all times say that we love firms that serially buy back their shares. Because if the variety of outstanding shares falls, investors do not need to do anything to attain a secure return and own larger and bigger shares in the corporate. Apple’s recent $110 billion stock repurchase authorization is the granddaddy of all of them – the most important in the corporate’s history. Apple has a protracted history of major buyback plans. We assume a mean annual club name buyback of $100 billion and desired to see how much that is value to shareholders. But first let’s set the table. Last week, Apple announced the unprecedented buyback alongside its fiscal 2024 second-quarter results, which showed concerns about iPhone sales and China’s weakness were overblown. As the second quarter continued to set records for the installed base of lively devices and services, Apple shares rose nearly 6% on Friday, the session following Thursday evening’s release. Apple also left the quarter with about $162 billion in money, equivalents and marketable securities on its balance sheet. Apple’s net money, after deducting debt, was about $58 billion. The net money position is essential because Apple goals to attain net money neutrality over time. It is a core tenant of our investment thesis since it implies that the surplus money the corporate generates each quarter flows back to shareholders through buybacks and dividends. Apple is placing greater emphasis on the buyback side of return on investment. A setback for Apple is commonly that the stock is overvalued given its revenue growth rate. We reject this and consider that what Apple lacks in revenue growth, it greater than makes up for in ecosystem strength and customer loyalty, representing a deep competitive advantage characterised by high switching costs and pricing power. All of this fuels Apple’s huge and robust cash-generating machine. We also consider that sales may surprise to the upside in the approaching years as artificial intelligence is increasingly integrated into devices, resulting in upgrades, and the Vision Pro’s form factor and price decrease, which can launch a brand new product category that’s currently still is in its infancy. To keep the maths easy, let us take a look at what Apple’s money generation means for investors by assuming no revenue growth and no margin expansion. The fiscal 2024 estimate of roughly $387.5 billion in revenue, which incorporates the 2 quarters already reported, and a net profit margin of 26.1% ends in net income of roughly $100.62 billion. Divide that by the roughly 15.54 billion shares of Apple outstanding, and we get an earnings per share (EPS) estimate of $6.48. At a valuation of 28 times earnings, we get shares priced at about $182 each, roughly according to Wednesday’s trading levels. To understand the dynamic that a buyback has on earnings, let’s leave these numbers unchanged going forward and assume that Apple continues to generate net income of $100.62 billion while selling $100 value of shares every year billions of US dollars repurchased. We find that the buyback alone increases profits – and subsequently the share price, by almost 3.7% per 12 months. This is a function of removing shares and dividing net income by a smaller variety of shares. That hypothetical 3.7% is not exactly essentially the most exciting return on this planet, but nobody expects Apple to face still. We also crunched the numbers using a mixture of share repurchases and operational improvements and located an expected five-year compound annual growth rate (CAGR) of roughly 8.5%. Adding an annual dividend yield of 0.55% to the present stock price of $182 per share puts our total annual return closer to 9%. In reality, that might probably be even higher, because the dividend payout is predicted to extend annually. So why not only own an S&P 500 index fund that has historically delivered total returns averaging over 10%? We’d argue that the estimates could prove conservative for Apple, and here’s why. If money flow estimates are confirmed, Apple can likely conduct stock repurchases averaging greater than $100 billion in the approaching years. Current estimates are that free money flow will increase from about $100 billion in 2023 to over $140 billion in 2029 (12 months 5 in our evaluation) – note that Apple can be expected to receive more in the long run will generate free money flow as income. The company is predicted to be drowning in money, which can be used to gobble up shares for the advantage of patient long-term shareholders. We don’t think the Vision Pro’s potential, especially as the worth and form factor drops, is appreciated on the road, neither is the potential for hardware refresh cycle acceleration on the back of AI-powered devices. Apple’s ecosystem and brand loyalty, together with its fortress-like balance sheet, make it less dangerous than the common stock, which is the case with an index fund. This view that Apple is a shelter – coupled with our view that the potential upside that comes from AI, Apple’s vision of “spatial computing” with the Vision Pro and the expansion of the services that will be powered by it, – causes us to acknowledge the danger/reward as very attractive. Because when Apple has nearly $60 billion in net money on its balance sheet and generates greater than $100 billion a 12 months in free money flow, the corporate doesn’t need a low rate of interest environment to speculate in growth. Apple controls its own destiny. Not only can Apple weather a wide range of business cycles and economic storms, but it’s also in a position to benefit from the hardships of others and are available out stronger on the opposite side. That was the Apple way. We’ve seen it recurrently 12 months after 12 months and see no reason to consider that may change any time soon. (Jim Cramer’s Charitable Trust has a protracted AAPL position. See a full list of stocks here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim discussed a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. 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We at all times say that we love firms that serially buy back their shares.
Because if the variety of outstanding shares falls, investors do not need to do anything to attain a secure return and own larger and bigger shares in the corporate.
AppleThe recent $110 billion share repurchase authorization is the granddaddy of all of them – the most important in company history. Apple has a protracted history of major buyback plans. We assume a mean annual club name buyback of $100 billion and desired to see how much that is value to shareholders.
But first let’s set the table.
