Author Topic: AAPL - Apple Inc.  (Read 1346894 times)

Myth465

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Re: AAPL
« Reply #30 on: January 20, 2011, 02:43:22 PM »

Myth: going back to WDC, I am even more surprised that a tech company with an empire building CEO (which isn't uncommon) and a glut of cash doesn't take them out.

My company is technically in oil and gas, but is really a boring old manufacturing company which services oil and gas clients. I am guessing most tech companies see WDC as a boring old manufacturing company. Not too sexy. Tech guys dont seem to look at cash flow, an empire builder typically ends up with the future failures at high prices - Myspace, Friendster, ect inmo.


ERICOPOLY

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Re: AAPL
« Reply #31 on: January 20, 2011, 02:44:35 PM »
If you guys are not in favor of buyback at any price, then there is a issue of when to buy back.

I am actually okay with a buyback at any price...

I simply did not say it is "good".  Neither did I say it is "bad".  From my perspective, it is neither good nor bad -- the price really doesn't matter.  Just like with a dividend -- nobody cares at what price the stock was trading at when the dividend was paid.  

The point is that the cash is being returned to shareholders -- either way.  Cash is cash.  Under the serial buyback scenario I would tend to believe that you would benefit (over time) from that method relative to the alternative which is to get your cash via a dividend.... but that's due to tax considerations only.  In a tax-free world, I would prefer to only get my money back via a dividend (no transaction costs and generally smoother).

Now, one benefit of a buyback (versus) a dividend when the price is low is that you might have wanted to reinvest in the company anyhow -- so you'd be bitching if they paid it to you as a dividend due to the extremely inefficient tax implications.  But aside from tax, if they paid you a dividend you could just buy the shares yourself... so no advantage to a buyback at low prices versus a dividend at low prices (unless tax is an issue).  The recurrent theme is tax.



Myth465

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Re: AAPL
« Reply #32 on: January 20, 2011, 02:47:20 PM »
If you guys are not in favor of buyback at any price, then there is a issue of when to buy back.

I am actually okay with a buyback at any price...

I simply did not say it is "good".  Neither did I say it is "bad".  From my perspective, it is neither good nor bad -- the price really doesn't matter.  Just like with a dividend -- nobody cares at what price the stock was trading at when the dividend was paid.  

The point is that the cash is being returned to shareholders -- either way.  Cash is cash.  Under the serial buyback scenario I would tend to believe that you would benefit (over time) from that method relative to the alternative which is to get your cash via a dividend.... but that's due to tax considerations only.  In a tax-free world, I would prefer to only get my money back via a dividend (no transaction costs and generally smoother).

Now, one benefit of a buyback (versus) a dividend when the price is low is that you might have wanted to reinvest in the company anyhow -- so you'd be bitching if they paid it to you as a dividend due to the extremely inefficient tax implications.  But aside from tax, if they paid you a dividend you could just buy the shares yourself... so no advantage to a buyback at low prices versus a dividend at low prices (unless tax is an issue).  The recurrent theme is tax.




You two are funny. I have seen this song and dance many times and look forward to the next engagement. With that said Ericopoly has won me over, it may not be prudent but its the same except for the tax differences.

DCG

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Re: AAPL
« Reply #33 on: January 20, 2011, 02:50:30 PM »
Apple has been my largest holding for a while, and I haven't sold any shares on the Jobs news. I'd rather wait for more specific information on his current health (if we ever hear anything), rather than joining the heard in selling shares just because people think other people/funds will be selling shares.  This is of course not his first leave of absence.

I of course worry about their future innovation if Steve passed away, but think their product pipeline will be strong for the next several years, with or without Jobs. Tim Cook has shown he can lead, and I think people underestimate the amount of the company's innovation that is tied to Jonathan Ive. That said, Steve Jobs is probably the best innovator and smartest marketer the world has seen in at least the last century, and he is extremely important to Apple in the long term.

Regarding their boatload of cash, I wouldn't complain if they paid a dividend, but it's also nice to know it's there in case they want to do a large acquisition. They have a rather impeccable history of not making stupid acquisitions. There are a much stupider things they can do with their cash than sit on it. The last thing I want to see is them become someone like Cisco that constantly makes acquisitions just for the hell of it. I think they would like to make a few acquisitions, but are incredibly patient and will only do so if it makes perfect sense to do so.
« Last Edit: January 20, 2011, 02:54:04 PM by DCG »

ERICOPOLY

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Re: AAPL
« Reply #34 on: January 20, 2011, 03:09:34 PM »
If you guys are not in favor of buyback at any price, then there is a issue of when to buy back.

I am actually okay with a buyback at any price...

I simply did not say it is "good".  Neither did I say it is "bad".  From my perspective, it is neither good nor bad -- the price really doesn't matter.  Just like with a dividend -- nobody cares at what price the stock was trading at when the dividend was paid.  

The point is that the cash is being returned to shareholders -- either way.  Cash is cash.  Under the serial buyback scenario I would tend to believe that you would benefit (over time) from that method relative to the alternative which is to get your cash via a dividend.... but that's due to tax considerations only.  In a tax-free world, I would prefer to only get my money back via a dividend (no transaction costs and generally smoother).

Now, one benefit of a buyback (versus) a dividend when the price is low is that you might have wanted to reinvest in the company anyhow -- so you'd be bitching if they paid it to you as a dividend due to the extremely inefficient tax implications.  But aside from tax, if they paid you a dividend you could just buy the shares yourself... so no advantage to a buyback at low prices versus a dividend at low prices (unless tax is an issue).  The recurrent theme is tax.




You two are funny. I have seen this song and dance many times and look forward to the next engagement. With that said Ericopoly has won me over, it may not be prudent but its the same except for the tax differences.

Well, Buffett would probably howl because Berkshire's capital gains tax rates are higher than Berkshire's dividend tax rates.  But then, this is coming from Buffett... the guy who advocates raising the personal dividend tax rate but has yet to advocate raising the dividend tax rate that applies to Berkshire..

ERICOPOLY

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Re: AAPL
« Reply #35 on: January 20, 2011, 04:27:22 PM »
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.

The mention of the ROTH is interesting.  I just thought of something!  Shares of foreign corporations (like FFH) held in a Roth are tax inefficient because there is no foreign tax credit to recover.  The Canadian government would take a cut of my FFH dividend and the US government would not reimburse me (because I have no US tax liability).  So in that case, it's a huge advantage to go the buyback at any price route on FFH dividends for US investors that hold in a ROTH (or regular IRA).

ragnarisapirate

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Re: AAPL
« Reply #36 on: January 20, 2011, 06:49:14 PM »
If you guys are not in favor of buyback at any price, then there is a issue of when to buy back.

I am actually okay with a buyback at any price...

I simply did not say it is "good".  Neither did I say it is "bad".  From my perspective, it is neither good nor bad -- the price really doesn't matter.  Just like with a dividend -- nobody cares at what price the stock was trading at when the dividend was paid.  

The point is that the cash is being returned to shareholders -- either way.  Cash is cash.  Under the serial buyback scenario I would tend to believe that you would benefit (over time) from that method relative to the alternative which is to get your cash via a dividend.... but that's due to tax considerations only.  In a tax-free world, I would prefer to only get my money back via a dividend (no transaction costs and generally smoother).

Now, one benefit of a buyback (versus) a dividend when the price is low is that you might have wanted to reinvest in the company anyhow -- so you'd be bitching if they paid it to you as a dividend due to the extremely inefficient tax implications.  But aside from tax, if they paid you a dividend you could just buy the shares yourself... so no advantage to a buyback at low prices versus a dividend at low prices (unless tax is an issue).  The recurrent theme is tax.





I may be missing something here, but, it seems to me that there is "good" and "bad" here.

Lets say that a company is trading well below net cash, is earning some money and their ROIC in the operating business is more or less break even (1%). Wouldn't it make sense to buy back the stock with their cash? Under that circumstance, they could effectively buy a dollar of cash on the balance sheet, for significantly less.

If they are a money losing company, that trades at some crazy premium to book value (more specifically intrinsic value), then, a buyback would be a terrible idea (as well as arguably owning the stock), and a dividend is more desirable.

It also seems to me that a buyback isn't really wholly returning money to shareholders, as, the people selling back to the company are either diluting themselves out of the company, potentially profiting less from the buyback, or, are selling completely out, so it isn't like they care about the company after the announcement of the buyback.

I fully believe that net of tax consequences to shareholders, AAPL would be better off declaring a dividend, and a company like EVI would be better off buying back stock (up to a certain level, as, due to their inordinate cash horde relative to market cap, it is really inexpensive to do).

Right?

BTW, I don't own either EVI or AAPL.

ERICOPOLY

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Re: AAPL
« Reply #37 on: January 20, 2011, 07:14:24 PM »

Lets say that a company is trading well below net cash, is earning some money and their ROIC in the operating business is more or less break even (1%). Wouldn't it make sense to buy back the stock with their cash? Under that circumstance, they could effectively buy a dollar of cash on the balance sheet, for significantly less.

Consider that if they paid the cash out to you as a dividend, you could own more shares instead by purchasing them with your dividend.  Either way, you own an equally greater economic share of the same cheap thing.   Just a wash, except for tax differences.



If they are a money losing company, that trades at some crazy premium to book value (more specifically intrinsic value), then, a buyback would be a terrible idea (as well as arguably owning the stock), and a dividend is more desirable.


The buyback merely increases your economic ownership of this terrible thing -- sell a proportionate amount of shares to bring your ownership level of the bad thing back to the prior level.  You have the same % ownership of the company, and you have the same cash you would otherwise have gained from the dividend -- but perhaps you'll be ahead by paying less taxes.


It also seems to me that a buyback isn't really wholly returning money to shareholders


This would be like saying that automatic dividend reinvestment programs (DRIPs) aren't wholly returning money to shareholders.


the people selling back to the company are either diluting themselves out of the company


The sales are not dilutive -- they own the same share of the company (post sale) as before the buyback took place.

Likewise, if you don't 100% reinvest your normal dividend into shares of the stock, then you are slowly being diluted out of the company by people who do!


, potentially profiting less from the buyback, or, are selling completely out, so it isn't like they care about the company after the announcement of the buyback.


There is no profit to be made from buybacks.  It's just the return of profits.  Similarly, there is no profit in the purchasing of new shares with your dividend.  There is no alchemy.


Right?

I guess I don't need to answer that one  :D

given2invest

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Re: AAPL
« Reply #38 on: January 20, 2011, 07:58:33 PM »
While I agree 100% with Eric, I'd like to reiterate one huge point:

If you own a stock, and can sell it at any time (liquidity is of no concern), then you believe the stock to be undervalued.

Given this fact, you should have no problem with a company buying back stock, given they have an overcapitalized balance sheet. 

Period.

As Eric has pointed out, if you believe that your ownership % of the company is too high post their buyback, you can sell stock and turn the buyback into a dividend. 

Let me give you an example: 

Company A is trading at $19.  It has $15 in cash, no debt, and earns $1 a year.  You have made it a 10% position since it trades at 4X earnings, net of cash. 

Company A announces that it is tendering for 50% of its outstanding shares at $20.  You can:

Tender.  Or not tender.  What is the result? 

If you tender, you now have a 5% position in a $20 stock that will earn $2 a share (share count cut in half) with $10 a share in cash (rough rounding).  You own the same % of the company as you did before the tender and the earnings multiple is 5.

If you don't tender, you still have a 10% position but your stake in the company has doubled.  An overcapitalized balance sheet has become less overcapitalized. 

Of course, in this example the stock would probably trade above the tender price and the company would end up buying back none of the stock.  Why is that?   Cause the market is rewarding the company and the board for giving the cash back to shareholders and right sizing the massively overcapitalized balance sheet.

ERICOPOLY

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Re: AAPL
« Reply #39 on: January 20, 2011, 09:00:19 PM »

If you own a stock, and can sell it at any time (liquidity is of no concern), then you believe the stock to be undervalued.

Given this fact, you should have no problem with a company buying back stock, given they have an overcapitalized balance sheet.  

Period.


Totally!

Logically, "hold" is the same as "buy" in this game (in a tax free world).  Psychology is different though from logic.