5 Ways Apple Is Trying to Pump Value Into AAPL Stock

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Back on May 6, Apple’s (AAPL) stock price hit the $600 mark the first time in nearly two years, marking an incredible recovery following a multimonth stretch in 2012-13 that saw the value of AAPL nearly halved.

Apple RumorsThere are many reasons why AAPL stock is clawing its way back to near its all-time high of $705.07, achieved on Sept. 21, 2012.

However, backing out Apple’s new slate of iPhones — which won’t even be out until later this year — very few of Apple’s moves of late have had anything to do with AAPL growing its business organically through the introduction of new products.

Instead, it’s using every capital allocation trick and more to move AAPL stock higher.

Today, we’ll look at five methods AAPL is using to create value for shareholders. It’s up to investors to decide whether the actions taken to date amount to real value, or if it’s mostly just smoke and mirrors.

#1: Faster Online Refunds

Angela Ahrendts has been in her new job as Senior Vice President of Retail and Online Stores for less than two weeks, and already her presence is being felt at AAPL.

Apple announced May 12 that the company was cutting the refund time for items purchased at its online site from 10 days to as few as five in order to provide a better customer experience. Returns, which don’t add to the bottom line, are viewed as a drain on business rather than a revenue generator.

Internet Retailer, a trade publication covering online retail, estimates that Apple generated $18 billion from e-commerce in 2013 or about 10% of its overall revenue. Clearly, Ahrendts believes Apple’s online business can be more productive by simply being easier to deal with on returns.

Whether this has any impact on the bottom line or AAPL stock remains to be seen.

#2: AAPL Buybacks, Dividends and a Stock Split

Manna from heaven — at least, that’s what it must have felt like for long-time AAPL shareholders who until August 2012 hadn’t received a dividend in almost 17 years.

Now, Apple’s capital return program has returned $66 billion to shareholders as of March 29, 2014, with plans to deliver more than $130 billion total by December 2015.

If the dividends and buybacks weren’t enough, the company also approved a 7-for-1 Apple stock split that theoretically enables more investors to lay their hands on AAPL.

Carl Icahn is happy with the buyback and Jim Cramer calls it “genius.” Personally, I see it as a carrot by Apple management to keep investors believing it has all the answers when it comes to capital allocation.

By no means is it genius. That award goes to Henry Singleton, who used Teledyne stock when it was expensive to buy companies … and then when they were cheap, he bought them back.

Singleton is the sultan of buybacks. Tim Cook? We’ll see.

#3: Acquisitions

Dr. Dre is joining AAPL management. Reports suggest that once the $3.2 billion deal to buy Beats is completed, both the rapper and partner Jimmy Iovine will take on executive roles within the company.

Without getting into the merits of each person’s qualifications to be an executive at Apple, this acquisition reeks of desperation.

Bob Leftsetz of the Leftsetz Letter wrote a scathing commentary about the Beats acquisition that included no less than 30 points why the deal is the ultimate in stupidity. Point 17 puts a spotlight on the crux of the matter:

If Jimmy Iovine goes to Apple, more power to him. But that will indicate the lunatics have taken over the asylum, Apple should first and foremost be about tech, Jimmy is at best a marketer. This would mean Apple is mature, and you know what happens with mature tech companies…”

In Leftsetz’s opinion, this move is Apple’s death knell.

Consultant Robert Sher wrote an article in Forbes that highlights the five reasons why half of all M&A deals fail. (Although more than two years old, the content is timeless.) Points two, three and five all apply to Apple. Investors might believe activity equals effort, but the value added to AAPL stock from this acquisition — its largest ever — is debatable.

#4: Pay Less in Taxes Overseas

How do you add shareholder value when all your cash is overseas and can’t be repatriated without paying 35% in federal tax?

By borrowing $29 billion over two years to buy back AAPL stock.

The first bond deal in 2013 (at $17 billion) saved the company approximately $9 billion in taxes, which means the second deal in late April (at $12 billion) theoretically kept another $6 billion from the U.S. Treasury for a total of $15 billion in tax savings.

Well played, Tim Cook.

However, AAPL finished Q2 with just $18 billion in domestic cash (12% of total cash hoard), and that number’s bound to go down as it continues to return money to shareholders. If Apple keeps this up, soon it won’t be able to finance another U.S. acquisition like Beats even if it wanted to. Companies driven by tax savings rather than innovation always end up on the scrap heap.

Of the five ways management’s trying to add value to AAPL stock, this has to be the most un-American.

#5: Retire Debt

Apple had absolutely no debt for the better part of nine years until its first bond issue in 2013. Now it has $29 billion, or about 13% of its total assets.

By no means is Apple over-leveraged, and because it’s paying between 0.45% and 3.85% in interest on its debt there’s no hurry to repay it. Especially when you consider it needs all the cash it can lay its hands on to repurchase AAPL stock.

Tim Cook is creating a debt junkie right before your very eyes. As soon as you can say lickety-split, Apple could have $50 billion or more in long-tern debt and no new products in the pipeline (the iPhone 6 isn’t new) to speak of.

How investors consider this adding value to Apple stock is beyond my simple comprehension. Cook has taken a pillar of capital allocation and turned it on its head. Bravo.

Bottom Line

Look, I’m an Apple guy. I use a Mac and have for years. But if this is the way Apple chooses to add value to its stock, I’m not sure the future is paved with gold. I need to see more innovation from Cupertino and less paper pushing. If Tim Cook wants to hang with accountants all day, he should head over to KPMG. If not, get down to the lab right away and don’t come out until you’ve come up with the next great tech gadget.

That’s how you pump real value into AAPL stock.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2014/05/aapl-stock-value/.

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