Apple Inc. (AAPL) May Double The Buyback: RBC Capital

Apple Inc. (AAPL) May Double The Buyback: RBC Capital
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A key question troubling Apple Inc. (NASDAQ:AAPL) investors currently is “how large of a buyback could AAPL execute?” Analysts Amit Daryanani and Mark Sue from RBC Capital Markets say that Apple Inc. (NASDAQ:AAPL) could almost double its $60 billion buyback.

Apple Inc. (AAPL) May Double The Buyback: RBC Capital

According to the report, even after doubling the size of buyback, Apple Inc. (NASDAQ:AAPL) will have a decent leverage ratio equivalent to 1.3 times the gross-debt/EBITDA.

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Icahn pushing for a change in capital allocation

Owing to favorable bond yields and share prices it is generally expected that Apple Inc. (NASDAQ:AAPL) will go for a bigger buyback. Activist investor Carl Icahn is also showing increased interest in the matter, which further fuels the chances of Apple going for a hefty buyback. The report believes Apple’s response to Icahn’s proposals will be interesting to watch as six months ago activist investor David Einhorn asked the iPhone maker to change the capital allocation.

Apple has sufficient room for additional debt

To determine the scale of buyback, analysts studied the debt levels of other large cap companies. On average, large cap companies have 2 times the Debt/EBITDA ratio. The same ratio for Apple Inc. (NASDAQ:AAPL) is at 0.3x, and the Cupertino-based firm has the largest cash position among all the large cap companies.

If Apple Inc. (NASDAQ:AAPL) goes for an “incremental debt” it could easily up the buyback by $50-90 billion while maintaining the ratio within 1.3-1.8x. According to the analysts, this move will help the EPS to rise by 10 percent to 17 percent and a “possible stock appreciation of $50 to $90.”

Comparing Apple Inc. (NASDAQ:AAPL) to International Business Machines Corp. (NYSE:IBM), analysts say that the former’s balance sheet does have sufficient room for more than $50 billion of debt. According to the analysts’ report, if Apple “were to minimally leverage their balance sheet comparable to IBM,” it could take on around $55 billion of additional debt. Assuming the debt is used to fund additional buyback, then after accounting for interest expenses at 3.5 percent, “it could result in $4.00 of EPS accretion.”

Also, if Apple Inc. (NASDAQ:AAPL) increases the leverage to 1.8 times then it could buyback more than 170 million shares equivalent to 18 percent of its float.

Apple’s current buyback program

Presently, Apple has a buyback program of $60 billion, which is to be completed by 2015. Of the authorized $60 billion, the company has repurchased 17.95 billion stocks. In April, the board raised the dividend to $3.05, which is being funded by a $17 billion debt raised by the company recently. Apple Inc. (NASDAQ:AAPL), as of now, has around $147 billion in cash ($106B International, $41B US).

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