AAPL - Apple Inc.

[indirect]

I have a friend who made good money on 300 2012 leaps. Now he is concerned about his profits and health of Steve Jobs. If he sells it will be a short term gain. Can he do a offsetting transaction and clear both transaction in June for long term gain. Any suggestions from experienced traders welcome.

 

PS I agree with his assessment of Steve Jobs. If he has recurrence, he is highly unlikely be able to come back. I am considering some long term puts

[Guest Bronco]

I am one of those people that thinks AAPL will produce tons of earnings/cash over the next year or so but I agree the long-term outlook just go murkier.  But I just bought a small amount of shares today to get back in.

 

What scares me more than Steve Jobs health is the clamoring for a dividend/buyback.  A buyback would be flat out stupid at this point.  Can't believe I am reading articles about this. 

 

I think the better long-term play is GOOG.  But I sold my shares and would wait for a pullback. 

 

I am not sure how many new devices Apple can produce now that their theme is out.  Integrated computers, phones, tablets and TV's.  How about integration with video?  There is no easy way to link my kid's videos into an Apple format that I know of (recorded on a Sony). 

 

It isn't too long ago I was taking the train to NY - trying to read content on my crappy PALM with service by sprint.  Technology does change fast. 

 

 

 

But integration and speed and extra features will the focus for the next 3 years IMO.  No big game changers. 

 

 

 

 

[given2invest]

I would love to hear why you think a buyback would be stupid.

 

1)  The balance sheet is grossly overcapitalized.  Do you disagree?  If you don't, then the only way to fix that is through a buyback, dividend, or acquisition. 

 

2)  You think the stock is undervalued, since you bought it.  Why, if undervalued, would you think it's stupid for the company to buyback stock at this level, given the overcapitalization?

 

 

[Guest Bronco]

#1 - I bottom ticked and top ticked this MF'er.  Bought in pre-market and sold in after market same day and caught 18 points.

 

Am I am the man?  NO.  Just lucky on this one. 

 

 

A couple answers to your question.

 

1) THE BIG, HUGE, STARING YOU IN THE FACE difference between me buying apple and a buyback is my purchase is temporary and their purchase is permanent.  I can sell if/when things go bad.  If you took all the publicly traded companies over the last 50 - 60 years I wonder how many just grew and grew and how many went bust or decreased in value.  Will Apple be different than a $400B Cisco?  I don't know. 

 

2) Apple is not great value but you can say with certainty that they will produce a ton of cash over the next 1 year.  Tons.  Plus the $60B in the bank.  So maybe decent value and more safety than most stocks.

 

3)  If I was Apple and wanted to buy back stock, I would have done it at $90 and not $350.  Come on.

 

4)  Some of the best investors around keep a lot of cash.  The stock has been doing pretty well without your beloved buyback.  Compare that to companies that have bought back 10's of billions - GS, GE, MSFT.  Buybacks at good prices?  Return to shareholders?

 

 

[given2invest]

I'm not going to answer all your points, though I will say this:

 

I don't own Apple but it's currently trading at 11X 2011 earnings (ex cash) growing like crazy.  Some very smart value investors own the stock.  No value investors owned Cisco at 80x earnings in 2000.  This is not the same situation.  I can't tell you if Apple's earnings will be halved in 10 years, but this isn't the same situation.

 

Regarding buybacks, we'll just have to agree to disagree.  In all situations where:

 

1)  You believe a balance sheet is overcapitalized

2)  You own stock in the company and can sell at anytime (ie, not liquidity constrained or locked up)

 

You would be ok and actually prefer a buyback to a dividend or cash sitting on the balance sheet.  

 

You said "some of the best investors keep cash around".

 

1)  Apple is an investor?  No, it's a company.  It's not a holding company that is supposed to deploy capital into non core assets.  

2)  How much cash then?  There has to be a number.  No value investor wants his cash stuck at the corporate level forever, unless that company is a diversified holding company and their purpose is to invest in diversified companies.

[Guest Bronco]

Agree to disagree.

 

But keep in mind we had huge buybacks in the 2000-2010 era and some call it the lost decade.

 

Bad timing by all these overcapitalized companies? 

 

I worked for a large Bermuda/Swiss conglomerate with steady cash flow and during the crisis they constantly had to sell their liquidity.  Cash on hand plus lines of credit...etc.

 

What is the correlation b/w the buybacks and the lost decade?  Any? 

 

Will buybacks work out well in the 2010 - 2020 era? 

 

I would be ok w/ a dividend but a 2% dividend would equate to $6B in a year.  Don't think Apple will do this.

 

I firmly believe that it is always better to work from a position of strength as opposed to weakness.  There are always critics to the companies that are always overcapitalized, but my guess is over the long-run these companies have MUCH better staying power. 

[given2invest]

Let me ask you this then:

 

Why shouldn't they do secondary offerings to raise more cash if they can never have enough?  (I promise I'm going somewhere with this question.)

 

 

[Guest Bronco]

Obviously dilutive to shareholders, sends potenital bad signal to market, wouldn't make sense for a well capitalized company.  Of course, you will suggest that if it makes no sense to raise capital then it makes sense to do the opposite.

 

But neither you or I know there capital plans the next 5 years.  And in tech, you have no idea what their product cycles will look like (no one does).  Apple right now prefers to be conservative.  They don't make decisions quarter to quarter.  Similar strategy to Buffett by the way.

 

They could buy EMC tomorrow and have no cushion left.  Who knows what they will do?  But I am against the investment community / MBA program grain when it comes to this stuff.  I prefer to follow Buffett.

[given2invest]

No, what I will argue is that there should be a right number in regards to capitalization, though two people can differ on what that number is.  Having general rules like "companies should never do buybacks, especially if their stock has quadrupled" are just as bad as "companies should always buyback stock, regardless of capitalization/value". 

 

It's corporate finance 101.  This has nothing to do with Apple, by the way. 

 

 

[Guest Bronco]

Tell Buffett about corporate finance 101.  I am sure he and Charlie would love to learn.  Love to be like everyone else.

[given2invest]

Are you comparing BRK to AAPL?  Or saying Buffett is against dividends/buybacks in companies they invest in?

 

 

 

 

[Guest Bronco]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

[given2invest]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

 

Friend, I'm not even arguing that Apple should anymore.  I'm just debating with you corporate finance. 

[ERICOPOLY]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

 

The math lays it out pretty damn clear:   a buyback at any price is equal to a dividend at any price -- as long as the shareholders sell an offsetting amount of their holdings.  In other words, it's a tax efficient pass-through of the cash.  The shareholders are the seller, the corporation is the buyer.  No value is destroyed, only returned to shareholders.  Run the math.

 

If you ever find yourself bitching at management for directing the corporation to buy back stock at an "inefficient" price, ask yourself why you aren't selling to them. 

 

[given2invest]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

 

The math lays it out pretty damn clear:   a buyback at any price is equal to a dividend at any price -- as long as the shareholders sell an offsetting amount of their holdings.  In other words, it's a tax efficient pass-through of the cash.  The shareholders are the seller, the corporation is the buyer.  No value is destroyed, only returned to shareholders.  Run the math.

 

Absolutely true.  Not debatable.  It's math.  

 

We can debate whether a stock is cheap or not, whether a stock is overcapitalized or undercapitalized, etc.  But you can't argue with math.  

 

Simply put, if you own a stock (I don't own Apple by the way) and you can sell it (not subject to liquidity issues), then you think the stock is undervalued.  You then need to ask yourself if the balance sheet is overcapitalized.   Many balance sheets are not!  But if it is, what is the best way to return/invest that overcapitalized balance sheet?

 

Suppose Apple won a $500 Billion lawsuit from the U.S. Government.  Let us also assume that the market cap went up $500 Billion as a result.  They now had $580 Billion on their balance sheet vs. a market cap of $800 Billion.  Do you think it makes sense for them to sit on $580 Billion or return some of that to shareholders?  Further, how should they do it?  Again, of you are long the stock - and could sell it at anytime - you would clearly prefer a buyback to a dividend, for tax purposes.  But regardless, you would just be happy with getting some of the cash returned to you.  

[Guest Bronco]

How can you run the math?  Companies don't tell you when and how much they buy back until after the fact.

 

I'm not looking to change anyone's opinions, and I obviously won't change yours.  But what you truly can't debate is why companies really do buybacks.  Quite simply, it is easy for CFO's and BOD's to do.  Low risk for them.  And I have been at enough big companies to know that.

 

And I completely don't buy into the theory that buybacks at any price are good.  Again, to me it smells of short-term thinking.  Q to Q management. 

 

Not for me.

[given2invest]

Where did anyone say buybacks at any price are good????

 

It might help if you actually read what I've written and answer the questions. 

 

 

[ERICOPOLY]

How can you run the math?  Companies don't tell you when and how much they buy back until after the fact.

 

I'll just lay out an example.  Let's say the company is a serial re-purchaser of it's own shares, irrespective of price or value.  Let's say that every quarter they buy back 1% of their outstanding shares, and you (as a shareholder) read about this every quarter.  So after getting the quarterly, you sell an offsetting amount of shares to bring your holdings back into balance and realize the cash distributed.  Some quarters you'll sell near or above the price the company paid, some quarters you'll sell at a lower price.  And you were the one telling me not to think on a short term basis?  Harumph!

 

Now, since you mentioned MSFT and DELL back in 2000, let's take a swing at that.  Back in 2000, the dividends were taxed as regular income.  So, for somebody with a cost basis of $50 in the 35% tax bracket, every $1 returned to shareholders via repurchase would be recovered on a tax-equivalent basis at a selling price of $32.50.

 

Yes, so while you might not necessary sell at the same price the corporation paid, you have a lot of room to go down -- potentially all the way to $32.50.  Other people with a higher cost basis would the added advantage of getting a tax loss, and some would be looking at a capital gain... but the capital gains rate was lower back then (relative to the dividend tax rate).

 

So it depends on a few factors... dividend tax rates vs capital gains tax rates, and cost basis being an important one.  But the serial repurchaser of shares will give their shareholders roughly equal chances to sell at lower or higher valuations over time.  Like you said, don't think short-term about this.

 

 

And I completely don't buy into the theory that buybacks at any price are good.

 

I'm not saying they are good either.  I'm just saying it's not really much different from paying a dividend, provided you sell some of your shares to offset your increased ownership.

 

I'll be the last one to bitch and moan if the company is willing to buy my shares for a high price.  Like... that's probably the least of my complaints about management!!!  Would somebody (anybody) please pay me at least full value?  I really don't mind who it is.

 

 

[given2invest]

"I'll be the last one to bitch and moan if the company is willing to buy my shares for a high price.  Like... that's probably the least of my complaints about management!!!  Would somebody (anybody) please pay me at least full value?  I really don't mind who it is."

 

This. 

 

 

[ragnarisapirate]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

 

The math lays it out pretty damn clear:   a buyback at any price is equal to a dividend at any price -- as long as the shareholders sell an offsetting amount of their holdings.  In other words, it's a tax efficient pass-through of the cash.  The shareholders are the seller, the corporation is the buyer.  No value is destroyed, only returned to shareholders.  Run the math.

 

Absolutely true.  Not debatable.  It's math.  

 

We can debate whether a stock is cheap or not, whether a stock is overcapitalized or undercapitalized, etc.  But you can't argue with math.  

 

Simply put, if you own a stock (I don't own Apple by the way) and you can sell it (not subject to liquidity issues), then you think the stock is undervalued.  You then need to ask yourself if the balance sheet is overcapitalized.   Many balance sheets are not!  But if it is, what is the best way to return/invest that overcapitalized balance sheet?

 

Suppose Apple won a $500 Billion lawsuit from the U.S. Government.  Let us also assume that the market cap went up $500 Billion as a result.  They now had $580 Billion on their balance sheet vs. a market cap of $800 Billion.  Do you think it makes sense for them to sit on $580 Billion or return some of that to shareholders?  Further, how should they do it?  Again, of you are long the stock - and could sell it at anytime - you would clearly prefer a buyback to a dividend, for tax purposes.  But regardless, you would just be happy with getting some of the cash returned to you.  

 

Well, the preference would actually depend on how a person holds the shares. If they were in a ROTH, that would have different implications than if it was in a personal taxable account. Additionally, tax rates would have some influence on the preference of shareholders.

 

I realize that this is getting pretty particular, but, they are real issues.

[given2invest]

My main point wasn't about dividends vs. buybacks but about optimal capitalization and that all companies should strive to achieve an ideal capital structure.  I think most boards fail miserably here and it's a shame because it's so fucking easy (compared to developing and marketing an Ipad) yet they ignore it. 

 

 

[Guest Dazel]

 

 

sorry guys.

 

I will make money shorting Apple over the next few years...it is impossible to keep a deflationary product

cycle going.......It has the 3rd biggest market cap on the planet...your top is near.(in the next year)...purely speculating of course.

I do not have a short postion.

 

Dazel.

[ERICOPOLY]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

 

The math lays it out pretty damn clear:   a buyback at any price is equal to a dividend at any price -- as long as the shareholders sell an offsetting amount of their holdings.  In other words, it's a tax efficient pass-through of the cash.  The shareholders are the seller, the corporation is the buyer.  No value is destroyed, only returned to shareholders.  Run the math.

 

Absolutely true.  Not debatable.  It's math.  

 

We can debate whether a stock is cheap or not, whether a stock is overcapitalized or undercapitalized, etc.  But you can't argue with math.  

 

Simply put, if you own a stock (I don't own Apple by the way) and you can sell it (not subject to liquidity issues), then you think the stock is undervalued.  You then need to ask yourself if the balance sheet is overcapitalized.   Many balance sheets are not!  But if it is, what is the best way to return/invest that overcapitalized balance sheet?

 

Suppose Apple won a $500 Billion lawsuit from the U.S. Government.  Let us also assume that the market cap went up $500 Billion as a result.  They now had $580 Billion on their balance sheet vs. a market cap of $800 Billion.  Do you think it makes sense for them to sit on $580 Billion or return some of that to shareholders?  Further, how should they do it?  Again, of you are long the stock - and could sell it at anytime - you would clearly prefer a buyback to a dividend, for tax purposes.  But regardless, you would just be happy with getting some of the cash returned to you.  

 

Well, the preference would actually depend on how a person holds the shares. If they were in a ROTH, that would have different implications than if it was in a personal taxable account. Additionally, tax rates would have some influence on the preference of shareholders.

 

I realize that this is getting pretty particular, but, they are real issues.

 

Yes they are real issues.  I don't deny it.  And another big issue for the small shareholder would be the transaction cost.

 

My point is just that buybacks are a return to the shareholder... if he chooses to reinvest in the stock then he does nothing.  If he chooses to use the cash elsewhere, he sells. 

 

For the best example I can think of, Microsoft returned a big chunk in a well advertised tender offer -- that's one way a company can return cash at a price you can sell it at, where you're not left to guess at whether or not they are buying back, and what was the price paid.  My father was actually holding some MSFT at the time that he had purchased at a higher price -- so better than a dividend where he would owe tax, he was able to sell at a loss and reduce his tax bill.

 

 

[Myth465]

I agree capital should be returned generally after a certain point for a none holding company. Alot of companies build capital simple to help push up the price on their options. If they pay out the capital then share prices generally fall.

 

Cash shouldnt be built up indefinitely and I am not sure why every tech company in the world likes to have $2 to $5 billion on hand "just in case"

[given2invest]

I agree capital should be returned generally after a certain point for a none holding company. Alot of companies build capital simple to help push up the price on their options. If they pay out the capital then share prices generally fall.

 

Cash shouldnt be built up indefinitely and I am not sure why every tech company in the world likes to have $2 to $5 billion on hand "just in case"

 

Or in the case of Apple, $60 Billion.