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Will Apple Raise Share Buyback?

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In a recent interview with The Wall Street Journal, Apple’s (AAPL - Free Report) Chief Executive Officer (CEO), Tim Cook, disclosed that the iPhone maker has bought shares worth $14.0 billion over the last two weeks taking advantage of a declining share price. The disclosure of the share buyback pushed the stock 1.4% ($7.17) to close at $519.68 on Feb 7, 2014.

Apple’s share price plunged approximately 8.0% following its muted second-quarter outlook (Apple Beats Earnings, Misses Revs). The company has spent more than $40.0 billion for share repurchase in the past 12 months.

The aggressive buyback comes at a time when Apple is facing increasing pressure from Carl Icahn to return more cash to shareholders. Icahn’s proposal to give back $50.0 million (in addition to the existing $60.0 million) through share buybacks will be voted on Feb 28, at Apple’s shareholder meeting.

However, the company and some large investors such as Institutional Shareholder Services Inc. (ISS) have asked investors to vote against the proposal.

Apple’s management has argued that the strong cash balance ($158.8 billion at the end of the first quarter) is necessary to maintain flexibility. CEO Tim Cook noted that the cash will help Apple to pursue its long-term strategies that may include large acquisitions.

As most of Apple’s cash is parked in overseas markets, a large buyback may force the company to repatriate some of it by paying a hefty tax. The company can also borrow for the purpose, which may bring down its credit rating as per Moody’s(MCO - Free Report) investor service.

We believe the rise in share price following the news of the aggressive buyback will put some enthusiasm back to the battered management team prior to the crucial Feb 28 meeting. The positive rise signaled investors’ confidence on management’s current strategy amid declining sales of the flagship iPhone and lack of innovative products.

We believe the urge for additional share buyback and dividend is secondary to the investors’ primary demand for a new innovative product, which will drive long-term growth. Apple continues to lose market share against Google’s Android operating system and handset maker, Samsung.

Tim Cook also admitted that iPhone sales in North America were stalled in the first quarter, which is a major concern. Although the distribution partnership with China Mobile (CHL - Free Report) is a positive for overall sales, sluggish North American business will negatively impact gross margins, going forward.

In such a scenario, we believe that investors may find Apple’s argument of holding cash more prudent in the near term.

Currently, Apple has a Zacks Rank #3 (Hold).

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