The Apple of Warren Buffet’s Eye

We continue our focus on Apple, for if there is one thing that catches Buffet’s eye, it is a stock that generates cash and then hordes it.

After dumping IBM and switching to Apple, the value investor of Berkshire Hathaway is at it again – targeting cash-rich companies with an undisputed business model, a cult-like following and unchallenged fundamentals. For investors looking for both dividend and growth - Apple (AAPL) now stands as a favourite gem that that has likewise caught Buffet’s eye – more than any other tech stock. (And certainly not even Microsoft)

Of course, this is at the back of its US$250Bn in gross cash stashed overseas – most of which is either parked in low yield treasuries and bonds or just depreciating as free cash sans inflation. It comes as good news that the money train that carries Apple’s stockpile of cash is, thanks to the latest US tax incentives, on a one-way trip back to US soil this year. For this reason, all eyes are peering as to what Apple will do with this windfall position.

As most market observers have noted - money that just sits around and does nothing is a wasted opportunity- considering that AAPL historically shows off an ROI of 18.5% and ROE of 37.5%. Would that cash be in a better position to deliver value to shareholders if it were within the grasp of management and shareholders at home?

Like Buffet, the rest of the market with an AAPL position is now banking on the promise from its latest earnings call that the company will put its net cash position (cash less liabilities) of US$163Bn to good use. From here on, we can only surmise what likely options the company will take. And look into each of these options as to which one is best to unlock shareholder value.

Acquisitions

Acquisitions mean deferred dividends for the shareholder. Looking at AAPL’s acquisition history – it has for many years avoided any major takeover but has preferred smaller bets; low profile acquisitions or Startups early in their development. It is a strategy, of course, that has allowed the company to integrate itself into the new technologies until such time they grow it organically as an AAPL initiative. These small acquisitions barely dent the company’s cash position.

Neither do we [oft rumoured] see Netflix or Tesla as likely targets – with Netflix as a US$130Bn maturing company and Tesla heading to what we believe is a most uncertain and problematic future.

Dividends

If you hold AAPL stock, you may like the prospect of a regular cash dividend or even a one-off cash distribution right now, especially that the company can well afford it.

If we are to assume that AAPL would return the entire US$163Bn net cash to shareholders in a 'One Off' distribution, this is almost equal to over US$32.00 of cash per each share owned. However, some growth investors like Buffet argue that cash dividends are money going out of the company – and in turn does not really improve shareholder value. It also means that if such a bonus is indeed paid, it will take a US$32 dollar hit from its current stock price.

We would prefer that AAPL keeps the cash in its coffers and find that ingenious way of making good on that position as it has done so efficiently in the past – sporting an impossible to beat 18.5% and 37.5% ROI and ROE respectively. We are saying forego that one-time windfall cash dividend now and let AAPL grow those funds over time.

Share Buybacks

Recently, despite market volatility, we have seen AAPL hit an all-time high on the heels of Buffet buying the stock to become the largest single shareholder. But it’s just not Buffet positioning into AAPL, but we suspect that the company has already initiated a major buyback campaign that best benefits both dividend and growth investors alike.

Buybacks generally boost the share price, as well as increase the earnings per and dividend per share of the stock. If we are to consider AAPL’s current 5.074Bn shares, a net cash of US$163Bn and a market price of US$180 – should AAPL use all available money to purchase the stock today – we’d see the stock go higher and the share count go down from 5.074Bn to 4.123Bn – or an almost 20% reduction in share float. From a valuation perspective: AAPL’s PE and dividend would both jump by 22%. That means a lot of upside for the stock at current levels.

Looking at AAPL on Buffet’s perspective – this cash position brings to the fore a win-win scenario for the company that does not even factor in the growth prospects from its core businesses. It is an icing on the cake that is that is more rewarding than the cake itself.

As our readers will have noted, we have since the global financial crisis of 10 years ago taken a sanguine view of the Oracle from Omaha. His ability to often speak with a sanctimonious forked tongue, be it on derivatives; weapons of mass financial destruction [which he deplores but uses] or the American bank bailouts where he used his status as a legendary investor to get exclusive deals unavailable to other market participants. Nonetheless, on Apple, we comprehensively agree with his assessment.


Go Back