Dear Tim Cook: I Want My Money Back
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As an Apple (NASDAQ: AAPL) shareholder, I like to keep in mind the fact that I own a little part of the business. You should see the reactions I get when I'm on a date and talk about Apple in terms of “my company.” It may be a bit of stretch – who doesn't exaggerate on a first date anyway? – But I do own a minuscule part of Apple, like every other shareholder.
As part owners in a business, we investors need to monitor and evaluate corporate management closely: I think Apple is making a really lousy capital allocation decision by keeping more than $137 billion in cash at the bank while earning uninspiring returns on that money, so I want some of that money back.
A cash flow machine
Apple increased its cash balance from $121 billion in September to 137.1 billion in December. That’s a sequential increase of almost $16 billion, and it comes after spending $2.5 billion in dividends and $2 billion in an upfront payments related to stock buybacks. Cash flow from operations reached a record of $23.4 billion, growing by almost $6 billion, which means a 33% year over year increase.
Even after considering capital expenditure needs, Apple has been generating tons of free cash flows over the years, so it doesn’t make much sense from an operational point of view to continue accumulating cash on the balance sheet. The company doesn't make big acquisitions, it's just not in Apple's DNA, and it has much more money that what it would possibly need to go through any difficulties.
So all this money which the company doesn't need to spend is wasting time in the bank, probably loosing value versus inflation when it could be much better invested in a very compelling investment like Apple's stock itself.
The rationale for a big repurchase
Apple has a modest buyback plan, but it’s only enough to compensate for share dilution, and it doesn't really make a big difference for shareholders. I think a dividend increase in the middle term is a distinct possibility, but a big share repurchase is the way to go. Not to support the stock price, but because Apple stock is a great investment at current prices.
To begin with, Apple is yielding 2.1% in dividends; this is probably more that what the company is obtaining from its low risk financial investments. From a corporate finance perspective, a repurchase seems like a good idea on a dividend basis alone.
Let's compare some valuation statistics for Apple versus other big tech companies like Google (NASDAQ: GOOG), eBay (NASDAQ: EBAY), IBM (NYSE: IBM) and Microsoft (NASDAQ: MSFT). This is not a homogeneous group, but they are all big players in the tech business, and they are much cheaper than other alternatives like Amazon and Facebook, so they make for a fairly conservative comparison.
Both Google and eBay are excellent companies which have reported fantastic earnings for the last quarter and they have some really exciting growth prospects in the long term. Google practically owns the online advertising market, and the company has made a brilliant strategic move with its Android operating system. eBay has done a great job at expanding PayPal as a standalone payment method outside its own platform, so the company is now a double play on two very promising trends: ecommerce and mobile payments.
These are great stocks, and I'm not saying they are too expensive at a P/E of 24 or 28 for Google and eBay respectively, but that's a really big difference versus Apple which is trading at a P/E ratio of 10. Are they that much better than Apple? I don't think so, and they are not too expensive either, Apple is just too cheap.
IBM is a high quality company, but not precisely one of the most aggressive growth stocks in the space. The company had decided to put profitability over sales growth a long time ago, and IBM investors are quite pleased with their growing dividends and an active share repurchase program. IBM is a solid company with a fair valuation, and it’s also trading at a considerable premium to Apple in terms of P/E, forward P/E and price to free cash flow.
As for the comparison with Microsoft, I think that's almost insulting to Apple. Microsoft has missed many of the most important innovations in the industry over the last years, while Apple is at the forefront of innovation. The iPad – which is selling like crazy – is inflicting some serious damage to the PC industry. Microsoft is struggling to find its way into the mobile computing revolution, yet the stock is more expensive than Apple.
The case for Apple's attractive valuation is almost a no brainer, the stock is cheap from multiple points of view. All that money that Apple is keeping in the bank, or in low yielding fixed income securities, should be put to work in its own stock which is a clearly smarter investment alternative.
How soon is now?
Apple has not ruled out an increased repurchase program, from the company's CFO during the latest press release:
We are pleased to have started our share repurchase program this quarter. And combined with our dividend, we returned about $4.5 billion of cash this quarter and we started the buyback program and expect to return about $45 billion over three years to our shareholders. We do consider increasing these programs and we’ll do what we think is in the best interest of our shareholders.
I'll tell you what, the cold hard numbers are saying that a buyback increase is in the best interest of shareholders, especially while the stock is so cheap. So now would be a really good time to start aggressively repurchasing stock.
acardenal owns shares of Apple, Google and IBM. The Motley Fool recommends Apple, eBay, and Google. The Motley Fool owns shares of Apple, eBay, Google, International Business Machines., and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!