Apple Inc. (AAPL): Why Carl Icahn Loves The Stock Buyback

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May 7, 2015 3:15pm ETF BASIC NEWS

Carl Ichan1Ian Wyatt:  Earlier this week, the world’s largest dividend stock made a big move.


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Apple Inc. (NASDAQ:AAPL) announced that it will return an additional $50 billion to shareholders through a combination of dividends and stock buybacks. Apple now plans to return $200 billion of cash to investors by March 2017.

The Apple dividend will be increased by 11%, and the dividend yield is 1.6%. But don’t be turned off by the low yield. The buyback is the more exciting news.

The Apple stock buyback program will be increased by 44%, and now stands at $140 billion. During the last fiscal year, Apple spent $45 billion buying back its stock. This expansion means that Apple will be ramping up its program in the next two years.

The size of this capital return program is unprecedented. The $200 billion that Apple plans to return to shareholders equals nearly 27% of the company’s $747 billion market capitalization.

This is good news for investors, including Carl Icahn. Through his Icahn Enterprises (NASDAQ: IEP), he has accumulated 53 million shares of Apple stock.

Icahn has been a vocal advocate of the Apple stock buyback program. He’s been pushing Apple CEO Tim Cook to aggressively return cash to shareholders.

One reason Icahn is so confident in the Apple stock buyback is because he thinks the stock is deeply undervalued. In February, Icahn published a letter that explained why he thinks Apple is worth $216 per share. If the stock reached that price, the company’s valuation would be $1.3 trillion.

Carl Icahn isn’t the only person who thinks Apple stock is undervalued. The company’s CEO said as much in the press release announcing the expanded capital return program.

Cook said: “We believe Apple has a bright future ahead, and the unprecedented size of our capital return program reflects that strong confidence. While most of our program will focus on buying back shares, we know that the dividend is very important to many of our investors, so we’re raising it for the third time in less than three years.”

Tim Cook is clearly saying that he thinks it’s in the best interest of shareholders to buy back shares, and reduce the overall number of shares outstanding.

Dividends clearly benefit shareholders, who can cash the checks or use their dividend payments to purchase more stock. But a share buyback program is a bit more complicated. Unlike dividends, you can’t simply measure buybacks with a simple calculation such as dividend yield.

When a company buys back its own stock, a couple things happen.

First, additional buying of shares on the stock market can support the share price. This means that there is more buying, which can send the stock price up.

Second, when shares are repurchased it reduces the total number of shares outstanding. When the number of shares is reduced, the earnings per share will rise as a result.

Over the last year, Apple has reduced its number of shares outstanding by 5.2%. And the investment of billions of dollars has helped contribute to the 52% rise for Apple stock in the last year.

No matter what you think about the future of new products including the Apple Watch or iCar, it’s clear that Apple is committed to its shareholders. That’s one of the big reasons to consider owning the stock today.

I’m bullish on Apple, and think this is one stock that every investor should own today. The stock is cheap, the growth is real, and shareholders are being rewarded along the way.

This article is brought to you courtesy of Ian Wyatt from Wyatt Investment Research.


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