Apple Inc. (NASDAQ:AAPL) has somehow landed in Carl Icahn’s crosshairs, and he won’t stop pestering management until the company follows his suggestion of doing a $150 billion share buyback. Of course he wouldn’t be Carl Icahn if he took “no” for an answer. But why is he so hot to see this share buyback done? And would all shareholders agree with him? Writing on iMore, Chris Umiastowski explains the good and the bad of Icahn’s idea.
Why Icahn is pushing Apple so hard
The analyst notes, just as Icahn has and others have before him, that Apple Inc. (NASDAQ:AAPL) is sitting on a mountain of cash. The company already gave into David Einhorn earlier this year and decided to buy back more shares, although it did so rather grudgingly and Einhorn himself, while placated, isn’t overly pleased. All of these parties believe that Apple shares are undervalued, so how can Apple give them a boost? A share buyback makes sense in some cases.
In this particular case, Apple has a lot of cash, and interest rates are very low. And by buying back shares, Apple would reduce the number of shares which are in circulation. For example, Umiastowski says if interest rates were zero, then Apple could buy back 20% of its shares and boost earnings per share by 25% because the same corporate profitability would be divided by 80% of the previous number of shares after the company did the buyback. And what usually happens when earnings per share goes up? The company’s share price usually goes up too.
Why Icahn’s idea might not be good for long-term Apple investors
The analyst suggests, however, that the place where Icahn is in the wrong is where he wants Apple Inc. (NASDAQ:AAPL) to take on $150 billion in debt to do this share buyback. He says that as a long-term investor, this doesn’t sound like a good idea because it increases the risk. Yes, it would boost Apple’s earnings per share and probably the share price, and the debt is cheap right now.
But as Umiastowski points out, what if something happens? What if things turn for the worse soon and Apple Inc. (NASDAQ:AAPL) finds itself unable to pay that debt in a few years? As a long-term investor in the company, he doesn’t think Apple should take on that massive debt load.
An alternative idea for Apple
Instead of raising debt, the analyst would prefer that Apple use future cash flow to buy back its shares or increase its dividend. He also suggests executing “cash borrowings representing one year of forward domestic earnings” and even says Apple might do that each year for the next few years.
He says his idea is a lot safer and provides “almost the same benefit” to long-term shareholders—unless Apple’s share price suddenly spikes higher.