Apple, Buy Back This Stock

It's sitting on a huge pile of cash—and there are compelling reasons to return some to shareholders

by Arik Hesseldahl

Angelos Dosoulas

Eighteen-and-a-half billion dollars is a lot of money.

It's more than the estimated 2007 gross domestic product of Nicaragua. It's bigger than the estimated 2005 expenditures of no fewer than 20 U.S. states. It's enough to give $60.78 to every person in the United States, and $2.77 to every person in the world.

And most importantly for Apple (AAPL) investors, it amounts to $21 for every share of company stock—and as of the end of most recent quarter, it's the cash pile sitting in Apple's coffers.

Time for a Buyback?

Shareholders certainly have shared in Apple's success over the years. The stock topped out at $199.83 on Dec. 28, an almost 19-fold increase over five years. Yet the growth in the company's cash hoard is starting to make people wonder, What exactly will Apple do with all that money?

Apple ought to return some of that cash to its shareholders in the form of a buyback. Apple may not have the biggest pot of money around. Cisco Systems (CSCO) and Microsoft (MSFT) both have more, in terms of absolute dollars, but on a per-share basis they have far less. Cisco's $22.7 billion translates to $3.80 per share, while Microsoft's $21 billion works out to $2.26 (and anyone following Yahoo (YHOO) knows well how Microsoft plans to spend it). Of the major technology companies, only Google (GOOG) boasts more cash per share than Apple: Its $14.2 billion works out to $45.37 a share.

And the time to buy back Apple stock is now. With the shares 40% below a historic high and the market nursing concern that Apple will suffer (BusinessWeek, 2/14/08) as the economy slumps and consumers curtail spending, an aggressive stock repurchase plan will do three good things for Apple shareholders.

Earnings-per-share Boost

First, it will send an unambiguous signal that management believes Apple's best days are ahead. Sure, iPod sales growth may be slowing for now, and there are concerns that iPhone revenue may be crimped as more people take advantage of so-called unlocking technology (BusinessWeek.com, 2/12/08) that lets them use the devices on networks other than those run by Apple partners. But there are lots of other reasons to feel bullish on Apple stock. The iPhone is going to be introduced in more European countries this year, and it may also be launched in China. Meanwhile, all the indications are that Mac sales will break the 10 million-unit mark in fiscal 2008, shattering 2007's record of 7 million.

Second, word of a buyback would probably give the stock price the kind of upward lift it needs. I found 295 companies on the S&P 500-stock index that have announced stock buybacks since the start of 2003, and they averaged a gain of more than 66% over five years. Gainers outnumbered losers by nearly 5 to 1, with the gainers improving their stock prices by an average of more than 150%.

Finally, reducing the number of shares outstanding—currently about 879 million—would boost earnings per share. And the size of that boost would depend on how much Apple is willing to spend to buy back its stock.