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Apple's Wimpy Stock Buyback Is a Teaser

NEW YORK (TheStreet) -- While Apple's "surprising" (AAPL) $14 billion stock buyback was the big story at the end of last week, it was the reaction by some that it caused that really caught my eye. One pundit labeled the move as "emotional" and "anti-free market." Others questioned the sanity of deploying nearly a third of the company's cash in order to prop up shares following an 8% drop post-earnings. My take, of course is a bit different.

While some may call it a bad move, I call it a no-brainer. While some blast Tim Cook for labeling the "massive" buyback a sign of confidence in the company's business and prospects, I applaud it. But there's much more going on here that allows management to be so "confident" making such a move and not thinking twice about it.

For one, Apple continues to be a cash machine, something that Tim Cook is well aware of. Last year, the company generated nearly $35 billion in free cash flow. During the first quarter of this year, Apple generated an additional $18 billion in free cash flow, so in theory, Apple just used up the majority of the past quarter's cash flow for the buyback.

But even if that makes you cringe, and you don't believe that future cash flows will be as healthy, take a gander at Apple's latest 10Q filing, namely the balance sheet, and locate "long-term marketable securities." There you will find that the company ended its' latest quarter with more than $118 billion in long-term investments. Note 2 gives you more detail and a breakdown of what comprises the $118 billion. In Apple's case, it's primarily commercial paper, Treasuries and agency securities, as well as mortgage and asset backed securities; all investments that will ultimately end up on the balance sheet as cash, whether it's via maturity or sale.

Yes, Apple just "spent" $14 billion on a buyback, and yes, that is nearly a third of the company's cash. However, it is a very small fraction of the company's total cash and marketable securities, which equated to $159 billion at the end of the quarter. Does that not seem nearly as bold now, does it? In fact, given the context, it actually seems like a very minor move. Perhaps the shock is due to the actual size of the transactions; $14 billion is a number that is so large that is difficult for investors to get their head around. But relative to the company's assets, it's small, a veritable drop in the bucket. It was a rather small move, in the scheme of things, but a nice opening salvo.

AAPL Long Term Investments (Quarterly) Chart
AAPL Long Term Investments (Quarterly) data by YCharts

Stock buybacks are often controversial, and there are bad stock buyback programs. When a company announces a buyback but it is just for show, and there is no follow-through in terms of actual share repurchases, that's a negative. If a company buys back shares at the wrong time, paying too high a price, either as a false show of confidence or because it simply paid too high a price, that's a negative.

What Apple did was a positive. However, it is not as bold of a move as the financial media is portraying. There are more Apple buybacks coming, whether due to pressure from shareholders and activists, or just because the company can afford it and the shares are cheap.

At the time of publication the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Heller, CFA,CFP® is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

  Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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