Analyst: Apple should consider big stock buyback

Posted by Dennis Sellers Oct 29, 2008 at 11:35am

Bernstein Research analyst Toni Sacconaghi thinks that, with US$24.5 billion in the bank, Apple should consider a big stock buyback, reports Fortune. Apple is sitting on a huge cash reserve—US$24.5 billion as of September and growing at the rate of $8 to $10 billion a year –  that’s doing almost nothing for it, the article adds.

The money is earning about $1.55 percent interest after taxes, according to Sacconaghi, at a time when the company’s stock is trading at a unusually low (for Apple) multiple of 15 times earnings. Mathematically, “share buybacks boost EPS (earnings per share) only if a stock’s P/E multiple is lower than the reciprocal of the after-tax interest rate earned on cash, the analyst says.

Apple has been trading at 30 to 40 times earnings in recent years, which Sacconaghi believes is one reason Apple hasn’t initiated a stock repurchase program in the past five years, says Fortune. But today, according to Sacconaghi’s model, Apple is trading at about 18 times his fiscal year 2009 earnings estimate (and about 13 times earnings using non-GAAP numbers).

Sacconaghi says that, by his estimates, US$10 billion dollars spent purchasing Apple share, he estimates, would boost the company’s (GAAP) EPS about four percent. A $20 billion buyback program would boost it about nine percent. And if the $20 billion program were front-loaded — completed in the first fiscal quarter of 2009— the company’s EPS could jump as much as 15 percent (or $0.75 a share).

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