Apple Inc. (NASDAQ:AAPL)‘s share repurchase program is a great way for the company to return value to shareholders. But to what extent, exactly, does it change the game for Apple investors?
Let’s find out.
Apple Inc. (NASDAQ:AAPL) has authorized a total of $60 billion in share repurchases. Even though the company has until the end of 2015 to follow through with this plan, it has already spent 30% of its allowance, leaving just about $42 billion left to spend.
To highlight the difference this $42 billion could make for investors, I’ll value the stock based on two scenarios. In scenario one, Apple Inc. (NASDAQ:AAPL) doesn’t repurchase $42 billion in shares. In scenario two, Apple does — at an average price of $495 per share.
Valuation without a buyback
Even at $618, Apple trades with a 25% margin of safety — certainly not bad.
Valuation with a buyback
The story changes quite dramatically when you factor in the $42 billion Apple Inc. (NASDAQ:AAPL) will inevitably spend before the end of 2015. At an average price of $495 per share, Apple could retire 84.85 billion shares.
How does this affect Apple’s valuation? Significantly. Adjusting for the buyback, Apple shares are worth about $684 per share. This means the stock is trading with about a 32% margin of safety, more than enough for my comfort.
Sure, maybe Apple won’t be lucky enough to purchase its own stock for an average price of $495. But if you’re in the camp that believes this, then that means you probably believe Apple is likely to be undervalued today.
And if you believe Apple shares will remain where they are today, or even sink, then that means Apple will be able to buy back even more shares, returning even more incremental value to shareholders.
Don’t underestimate Apple’s cash hoard
Now that you’ve seen how much Apple’s current share repurchase program can positively affect valuation, keep in mind that Apple has far more than $42 billion lying around. Today, its cash hoard amounts to a whopping $146 billion. And don’t forget about the approximately $2.8 billion the company pays out in dividends each quarter.
When it’s all said and done, Apple is fundamentally cheap.
The article Apple’s Share Repurchase Program Could Bring an Upside originally appeared on Fool.com and is written by Daniel Sparks.
Fool contributor Daniel Sparks owns shares of Apple. The Motley Fool recommends and owns shares of Apple.
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