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Apple Inc. (AAPL): Value Creation and Stock Splits

With the stock price of Apple Inc. (NASDAQ:AAPL) below the $400 mark, the company can take a few steps to create value for its shareholders. Apple is being rather tight-lipped about its next line of new and innovative products, mainly for strategic and competitive reasons. However, the company can take more solid steps to expedite its value creation as its stock price is at 52-week lows. Apple can step up its share repurchase program to actually create value, and simultaneously consider a stock split to make the most out of ongoing investor pessimism.

Valuation is cheap

With Apple Inc. (NASDAQ:AAPL)’s stock price below $394 the company’s dividend looks very attractive for yield-seeking investors, while simultaneously waiting for decent capital gains in the medium term. Apple is trading at a decent discount to its true intrinsic value under any valuation method. Apple has a trailing twelve month P/E of 9.4, and a forward P/E of 9. And Apple has an Enterprise Value of roughly $242 billion, after adjusting for its total cash position of $145 billion and the recent $17 billion debt issuance.

Apple Inc. (NASDAQ:AAPL)Owing to the massive success of the iPhone and iPad product lines, Apple Inc. (NASDAQ:AAPL)’s cash balance has seen dramatic increases every quarter. The company now has cash per share of roughly $152, which protects a sizable portion of the downside risk of investing in Apple shares at current prices. And at such an attractive market price, the company should take strides to accelerate its share repurchases. Apple has an authorization of repurchasing up to $60 billion worth of stock and the company should take steps to expedite that process.

Share repurchase hasn’t done well

Often times the management of a company repurchase shares at very high market prices which negatively impacts their cash cushion for the future. Apple Inc. (NASDAQ:AAPL)’s stock has been trending downwards in the last one year, and as a result, the company’s share repurchases have been very ill-timed. So far, Apple has bought back 4.08 million shares utilizing $1.95 billion of cash at an average repurchase price of $478.20.

Since the company’s shares have dipped below $400 recently, the share repurchase hasn’t added any value to the company’s existing stockholders and would have been better off sitting in Apple Inc. (NASDAQ:AAPL)’s balance sheet. But at current prices the company should use multiple banks and brokers to really ramp up its share repurchase, which if executed properly, can add solid value for shareholders in the long-run. If Apple can retire a sizable number of shares from the open market, it will give the company’s earnings per share a sizable boost.

On the contrary, numerous companies have done a fantastic job of creating value for shareholders like Time Warner Inc (NYSE:TWX). The media and entertainment empire of Time Warner generates a steady stream of revenue and cash flow, and has done a commendable job of executing a share repurchase program that benefits shareholders. Time Warner’s board green-lighted a share repurchases of up to $4.0 billion in Jan-2013, and the company did a great job buying back 12 million shares for $660 million at an average price of $53.61.

Time Warner Inc (NYSE:TWX)’s stock price is trading above $57, as a result, the share repurchase has been beneficial for shareholders in driving the value of the company. However, the same thing cannot be said for Apple Inc. (NASDAQ:AAPL).

The case for a stock split

Apple Inc. (NASDAQ:AAPL) had three 2-for-1 stock splits in its operating history and the last one took place in Feb-2005. Even though the markets are largely dictated by the moves of the large institutional investors, the small investors and big investors love stock splits. Stock splits give investors a psychological boost, as they own more shares of a company.