But Apple’s incredible success has also led to the accumulation of a massive$65.8 billion cash hoard that has come under fire lately. Yair Reiner, an analyst at Oppenheimer & Company, thinks Apple’s cash is “truly untenable,” and Toni Sacconaghi, an analyst at Sanford C. Bernstein & Company, feels Apple should pay a 4% dividend and initiate a $30 billion stock buyback to “mitigate investor fear of a potentially large, value destroying acquisition and create financial discipline,” which would, of course, ”create shareholder value.”
No. As Horace Dediu pointed out, when technology companies institute stock buybacks, they don’t create a lot of shareholder value, if any at all. Microsofthas spent a little more than $97 billion on buybacks since 2004 and its share price has gone up less than 10%. Over the last 10 years, it has spent over $170 billion on both buybacks and dividends while MSFT has gone down 19.92%. At the same time, networking giant Cisco has returned $50.7 billion to shareholders since the beginning of 2004 while its share price has dropped 35.58%. Additionally, RIM’s stock price has plummeted 21.16% since it announced a share buyback program less than 30 days ago, on June 16th. Though other factors certainly could have played a part in the depreciation of the share prices of the aforementioned companies, using cash for stock buybacks and dividends clearly isn’t the best way to increase shareholder value.
Richman’s wrong here. Using cash to buy back stock is an excellent way to increase shareholder value, assuming that the stock in question is undervalued. If a stock is undervalued, each dollar of buyback creates more than one dollar of value. It’s like buying dollar bills for, say, 75 cents. There is a good argument that AAPL is undervalued right now. If so, buybacks would create shareholder value.
The problem with the MSFT and RIMM buybacks was that the companies were buying back stock that was overvalued. The problem wasn’t the strategy (buybacks), but the execution (buying back overpriced stock).
I understand why Apple’s holding on to their $70 billion right now. However, Apple’s cash reserves may eventually become larger than any reasonable need for competitive advantage, business-related activity, etc. When that occurs ($100 billion? $200 billion?), the company is duty-bound to return some of the money to the company’s owners (AAPL shareholders). If AAPL’s fairly valued at the time, then a dividend would be appropriate. If AAPL’s undervalued at the time, then a buyback is a reasonably strategy that will create, not destroy, shareholder value.