In a recent interview with The Wall Street Journal,
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.
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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
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
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
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
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 (
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).