Apple buyback puts value before growth

Buy low, sell high. That's the investor's credo, and one Apple appears to have followed.

Buy low, sell high. That's the investor's credo, and one Apple Inc appears to have followed when it pounced on a drop in its own stock price to buy $US14 billion of its shares in two weeks.

The move will not likely satisfy those who say Apple needs to introduce a new product - such as a rumoured wristwatch - to boost long-term sales. But Apple shares rose 1.4 per cent on Friday to $US519.68, and the buyback should afford chief executive Tim Cook some kudos from big investors like Carl Icahn, who have been urging the company to return more money to shareholders.

The size of Apple's buyback will meaningfully adjust key valuation metrics, such as estimates on its first-quarter earnings, which were expected to rise to $US10.48 a share from $US10.15 a share as a result of a three per cent reduction in the float, according to Greg Harrison, senior research analyst at Thomson Reuters.

Value over growth

Apple's forward price-to-earnings ratio would fall to 11.65 from 12.02, bringing it further below the 13.02 average P/E of its peers. Had Apple bought these shares prior to the fourth quarter, it would have reported a profit of $US14.96 a share instead of $US14.50.

"If you're a long-term investor in Apple, this is a reason to buy," said Minyi Chen, who manages the TrimTabs Float Shrink ETF, an actively managed exchange-traded fund that buys companies with shrinking floats and which added to the fund's position in Apple on Thursday.

"This is more of a value-stock strategy than a growth-stock strategy."

US companies that have made a habit of steadily reducing their share count have beaten the broader stock market for the last several years.

According to Tobias Levkovich, the chief US equity strategist at Citigroup, S&P 500 companies that regularly reduce their share counts rose 550 per cent between 2003 and mid-2013, outpacing the index's "dividend aristocrats," which have returned about 400 per cent in that time.

Apple's latest share buyback is part of its plan to repurchase $US60 billion of its stock. The tech giant has struggled to regain its once-blistering growth rates in the absence of new product categories. Cook has said the buyback is a sign of management's confidence in the company.

There has been concern about the rate of growth in the US economy, with some analysts blaming sluggish growth on large companies spending more money on share repurchases and dividends instead of capital expenditures or research and development.

"The question is ... if the best use of cash is to put it toward reducing the denominator on your earnings per share and try to grow your growth that way as opposed to trying to grow it from the top down," said Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta, which owns the shares.

"I have mixed feelings about it," he said.

The Icahn factor

Last week, Icahn bought another $US500 million of Apple shares. His proposal for the company to give back $50 billion more through share buybacks will be voted on at the February 28 shareholder meeting.

"If Tim (Cook) wants Icahn's proposal shot down, he needs the stock to look strong going into the meeting. He needs to show that management is doing something about the stock's under-performance," said Antony Filippo, a Toronto-based independent investment manager, who does not own the stock.

Filippo has a short position in call options with an $US800 strike price expiring in January 2015 - a bet that only becomes a loser if the stock exceeds that price by that time.

The company's buying could be why the stock stemmed its losses after falling eight per cent on January 28, after Apple reported quarterly results. The shares are up 3.8 per cent in February, compared with a 0.8 percent rise in the S&P 500.

On that day, Reuters asked Icahn in a telephone interview if Apple should be buying back shares as the stock was falling. Icahn answered, "I hope so. That's what we're doing.

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