Apple Inc. (NASDAQ:AAPL) CEO Tim Cook is repeatedly doing the same thing over and over again and is expecting different results every time, says Trip Chowdhry at Global Equities Research. This is exactly how Albert Einstein defined insanity, he added.
Apple taking on debt to appease investors
In a conference call with analysts last week, Apple CFO Luca Maestri said the company plans to remain very active in the U.S. and international debt markets in 2016 to fund its capital return activities. Maestri said they plan to detail those activities when reporting the company’s second-quarter results in April.
For quite some time now, Apple has been raising debt to pay dividends and make share repurchases, but the company’s stock has performed badly relative to the broader market since then. Keeping this in view, Chowdhry suggests that it seems crazy that both Cook and Maestri continue to make the same mistake.
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Cook’s regime began in August 2011, and a year later, owing to pressure from major shareholders like billionaire activist investor Carl Icahn, the iPhone firm paid out its first regular dividend in nearly 17 years on Aug. 16, 2012. Apple’s stock has gained 7.1% since then, while the S&P 500 has climbed 37% and the NASDAQ Composite has gone up 51%.
During the same period, Chowdhry points out that Apple has bought back shares worth $110 billion and has paid dividends worth $43 billion, after which its debt skyrocketed to $63 billion.
“Obviously, share buybacks and dividends are not working and somehow the current CFO thinks that doing the same thing over and over again may generate different results,” Chowdhry noted.
Depressed valuation a bigger concern
Though the stock decline is a concern for the company, the depressed valuation in relation with the broader market is even more concerning. FactSet data reveals that Apple’s price to earnings ratio (last 12 months of earnings) was 15.52 on Aug. 16, 2012 and that it had fallen to 10.33 as of Friday. In comparison, the P/E ratio for the S&P 500 increased from 13.25 to 16.64 in the same period. Such a decline in Apple’s P/E multiple relative to the S&P 500’s has resulted in a value loss of about $480 billion for potential shareholders, Chowdhry calculates.
“Apple share buybacks have been a complete disaster,” the analyst said.