Apple Can't Buy Back Confidence
As much as it is, $40 billion doesn't always buy your way out of a jam.
Apple AAPL +1.40% has been on a buyback tear, repurchasing $40 billion of its own shares over the last 12 months. About $14 billion alone came the last two weeks. That is since the company's fiscal first-quarter results disappointed and the stock fell 8% in one day.
While part of an existing $60 billion buyback plan, chief Tim Cook painted the move during an interview with the Wall Street Journal last week as an investment in Apple, effectively saying the stock is undervalued. With Apple's shares currently trading at less than eight times forward earnings—excluding its $159 billion cash hoard—the valuation is certainly undemanding.
But buybacks aren't making the best use of Apple's resources, even if they helped Apple in its most recent period deliver its first quarter of earnings-per-share growth after four straight declines.
If anything, they make the company appear reactive.
Activist Carl Icahn has been pushing for $50 billion more in buybacks. However, share repurchases haven't been a major driver of Apple's share price. The stock is still more than 10% below its level of March 19, 2012, when the company announced its first dividend and buyback.
Little wonder, since the return on Apple's stock purchases isn't great. Looking at the $14 billion of stock the company bought back on the open market in the last three quarters of 2013, the return to date, excluding dividends, is less than 8%.
Granted, not much time has elapsed. Yet with Apple's actual business generating an average return on invested capital of 28.6% in fiscal 2013, according to FactSet, the company's efforts at financial engineering pale in comparison.
Having spent nearly $4.8 billion on research and development in the last calendar year, Apple clearly has new products in the hopper. Those are what will drive higher returns, not a campaign to appease Mr. Icahn.