Earlier this week, I wrote an article on AAPL and MSFT and I mentioned how the two main ways that companies can return cash to shareholders are dividends and share repurchases. I like both, but for different reasons. Dividends allow me to reinvest capital anywhere, but I get taxed on those dividends (unless the shares are held in a tax deferred retirement account). Share buybacks are when the company reinvests capital for me back into the stock I hold.

Share buybacks don’t cost the company or the shareholders any tax, and so they are much preferred to dividends, as long as the stock they are buying back is not overpriced. I think of share buybacks as a tax free automatic reinvestment plan. Buybacks can create a lot of value for shareholders when they are done at low prices.

Largest Buyback in History

Yesterday, Apple announced the largest buyback in the history of corporate America. They will be raising their repurchase program from $10 billion to $60 billion. This means they will repurchase around 15% of the outstanding shares through 2015. They also announced a dividend increase of 15%, or $12.20 annual dividend per share, which represents a 3.0% yield on today’s stock price of $406.

In total, the company will return around $100 billion to shareholders over the next three years, or about 26% of the current market cap of Apple. Think of this as an 8% annual yield (3% from cash dividends, and 5% from share repurchases). Another thing to highlight from the report is that Apple’s cash balance increased another $7.6 billion, leaving it’s total cash hoard at $145 Billion.

Revenue increased 11% and earnings per share decreased 18%, and I’ll leave the rest of Wall Street to obsess about where margins are headed and what next quarter’s earnings will be. But the most significant thing from this report is the incredible share buyback announcement. I think that this will create incredible value for AAPL shares over the long term. Think of the $100 billion in returned cash to shareholders (26% of the market cap) as a margin of safety.

Here is a quick chart of the new capital allocation strategy at AAPL:

AAPL Capital Allocation

Disclosure: John Huber owns AAPL and MSFT for himself and his clients. Nothing here constitutes a recommendation to buy or sell any stock that is mentioned. Please do your own research.

 

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