We always say we love companies that are serial repurchasers of their stocks. That’s because as outstanding share counts go down, investors don’t have to do anything to get baked-in returns and own larger and larger pieces of the companies. Apple ‘s latest $110 billion stock buyback authorization is the granddaddy of them all — the biggest in corporate history. Apple has a long history of huge repurchase plans. Assuming an average annual $100 billion buyback by the Club name going forward, we wanted to look at just how much that is worth to shareholders. But first, let’s set the table. Last week, Apple announced the unprecedented buyback along with fiscal 2024 second-quarter results that showed that concerns about iPhone sales and China’s weakness were overblown. With more records set for its installed base of active devices and services in Q2, Apple stock rose nearly 6% on Friday, the session following Thursday evening’s release. Apple also exited the quarter with roughly $162 billion in cash, equivalents, and marketable securities on the balance sheet. Apple’s net cash position was about $58 billion after debt. The net cash position is important because Apple aims to be net cash neutral over time. It’s a core tenant of our investment thesis because it means that the excess cash the company generates every quarter will make its way back to shareholders via buybacks and dividends. Apple leans more heavily on the buyback side of capital returns. One knock on Apple from the bears is often that the stock is priced too high given its revenue growth rate. We push back on that, believing what Apple may lack in terms of topline growth, it more than makes up for in ecosystem strength and customer loyalty, which provides a deep competitive moat characterized by high switching costs and pricing power. All that fuels Apple’s immense and resilient cash generation machine. We also think the topline can surprise to the upside in the coming years as artificial intelligence is increasingly integrated into devices, prompting upgrades, and the form factor and price of the Vision Pro come down, which will catalyze a new product category currently in its infancy. To keep the math simple, let’s consider what Apple’s cash generation means for investors by assuming no topline growth and no margin expansion. The fiscal 2024 estimate of about $387.5 billion in revenue, which includes the two quarters already reported, with a 26.1% net income margin, results in about $100.62 billion in net income. Divide that by the roughly 15.54 billion outstanding shares of Apple, and we get an earnings-per-share (EPS) estimate of $6.48. At a valuation of 28 times earnings, we arrive at a share price of about $182 each, right around where it was trading Wednesday. To understand the dynamics a buyback has on earnings, let’s keep those numbers static going forward, figuring Apple continues to deliver $100.62 billion in net income while repurchasing $100 billion worth of shares each year. What we find is that the buyback alone grows earnings — and, in turn, the share price by a rate of nearly 3.7% per year. That is a function of removing shares and dividing net income by a lower share count. That hypothetical 3.7% isn’t exactly the most exciting return in the world, but nobody expects Apple to stand still. We also ran the numbers with a combination of share buybacks and operational improvements and saw an expected five-year compounded annual growth rate (CAGR) of about 8.5%. Add in an annual 0.55% dividend yield at the current stock price of $182 per share, and that puts our total annual return math closer to 9%. In reality that would probably be even higher, because that dividend payout is expected to increase annually. So, why not just own an S & P 500 index fund, which has historically delivered a total return north of 10% on average? We would argue that estimates for Apple could prove conservative, and here’s why. Apple can likely do share repurchases greater than $100 billion on average in coming years should the cash flow estimates play out. Current estimates project free cash flow growing from about $100 billion in 2023 to north of $140 billion by 2029 (Year 5 in our analysis) – note the expectation is also for Apple to generate more in free cash flow than it does in income going forward. The company is expected to be drowning in cash, which will be used to gobble up shares to the benefit of patient long-term shareholders. We don’t think the potential of the Vision Pro, especially as price and form factor come down, is being appreciated on the Street, nor is the potential for an acceleration in the hardware refresh cycle on the back of AI-enhanced devices. 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 — paired with our view that the potential upside resulting from AI, Apple’s vision of “spatial computing” with the Vision Pro and the growth in services that it can power —causes us to view the risk/reward as highly attractive. After all, when Apple has nearly $60 billion in net cash on the balance sheet and generates more than $100 billion per year in free cash flow, the company does not require a low-interest rate environment to invest in growth. Apple controls its own destiny. Not only can Apple weather a variety of business cycles and economic storms, but it’s in a position to take advantage of the pain of others and come out stronger on the other side. This has been the Apple way. We’ve seen it consistently year in and year out and see no reason to think that will change anytime soon. (Jim Cramer’s Charitable Trust is long AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will 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 trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
We always say we love companies that are serial repurchasers of their stocks.
That’s because as outstanding share counts go down, investors don’t have to do anything to get baked-in returns and own larger and larger pieces of the companies.
Apple‘s latest $110 billion stock buyback authorization is the granddaddy of them all — the biggest in corporate history. Apple has a long history of huge repurchase plans. Assuming an average annual $100 billion buyback by the Club name going forward, we wanted to look at just how much that is worth to shareholders.
But first, let’s set the table.