However, both Google and Apple generate substantial amounts of Free Cash flow on an annual basis, and should not be a problem at least near-term. As a result, Apple can easily ramp up its buyback plan, and do a sizable buyback for driving the shares higher. Buying substantial amounts of stock have been a catalyst for sending the share price higher for companies like International Business Machines Corp. (NYSE:IBM) and Yahoo! Inc. (NASDAQ:YHOO).
Even if Apple wants to hold onto its conservative stance, it can use multiple foreign banks to borrow funds in this low interest environment. And can pay-off these foreign banks with offshore cash. As a result, it will be utilizing off-shore cash, and getting tax deductions for using debt in its capital structure as well. In addition, to making the buyback a catalyst, Apple can also pursue these alternative methods for creating shareholder value.
1. One Time Special Dividend: A non-committal one-time special dividend should calm down the nerves of investors. The no strings attached nature of special dividends is increasingly becoming a great alternative for many companies, as it gives corporations a lot more flexibility down the road.
2. Stock Split: There is no real value creation from a stock split. However, a stock split would open the stock up to more investors, and the market forces of demand and supply will push the price higher. This can be easily done to boost the current stock price with minimal effort.
3. Increase Dividend Substantially: This is the most straight-forward option, and also, the least desirable because it creates a major cash obligation every quarter and also creates tax obligations on recipients right away. However, Apple has a lot of cash to foot a sizable dividend increase and can do so with relative ease.
Apple can do a lot with its cash position. Giving the investors a one-time special dividend, in addition to its regular dividend, will settle the nerves of many investors, as it doesn’t create a recurring liability either. Also doing, a stock split might be a worthwhile endeavor. However, the preferred stock idea pitched by Einhorn is clearly not the best available option.
Apple’s CFO had hinted that the company might consider increasing the buyback, but hasn’t confirmed. It is pretty evident that, a major value enhancing opportunity is available for the company to do an expedited buyback worth $30-$40 Billion at current prices, and still sleep very well at night.
The article Apple Should Expedite Share Repurchases originally appeared on Fool.com and is written by Ishfaque Faruk.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.