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3 Reasons Apple's $90 Billion Share Buyback Is an Epic Error

NEW YORK (TheStreet) -- Apple's (AAPL - Get Report) $90 billion share buyback program is one of the most egregious misallocations of capital in corporate history. These funds have done nothing to address the market weaknesses and improve the long term competitiveness of Apple. Here are three of the many reasons why.

The main one is that Apple is moving from a position of weakness, not strength. According to Finviz, there has not been single Apple insider buy since last June (there were two option exercises). There have been well over 20 insider sales at prices as low as $401.76 a share on June 24, 2013. If the stock was so undervalued, it would seem there would have been at least one Apple insider buy on the open market over almost the last year.

Which brings up the second reason: Apple is responding to speculators, not investors. There has been a great deal of pressure put on Apple by Carl Icahn and others to increase the dividend and buy back more stock. That is no way to run a company like Apple that has slipped so much (now around $595 a share, the stock was over $700 a share in September 2012 before $90 billion in announced buybacks, nearly one-fifth the current market capitalization of the company).

The third reason is that Apple has done little to diversify its line of business or augment its weaknesses, which is what investor pressure would compel. Margins for iPhones have fallen more than 20%, with more drops likely. Sales of the iPad are down. The company has always been anemic in emerging markets. Outside of China and Japan, according to Apple's 10Q, "net sales in the rest of Asia Pacific segment declined year-over-year." That is where the bulk of consumer spending will be coming from in the future.

Almost two years ago when Apple was around $700 a share, I wrote articles about how the company needed to cash in and diversify by acquiring companies like Sprint (S) and TMobile USA. At that time, Apple was rich and those businesses were rattling the tin cup. Since then, the share price for Apple has fallen close to 20% as that for Sprint has jumped by about one-half.

More importantly, that $90 billion needed to go to diversify and expand Apple's business operations rather than buying back shares that insiders do not find appealing.

At this time, Apple is like General Motors (GM) with its Cadillac and Buick line in the early 1970s. It is doing well at the top of the market with the iPhone, but future sales will reward solid lower end mobile phones of an acceptable quality and level of performance, just as cars and trucks from Toyota Motor (TM) and Honda (HMC) soared in sales due to a shift in consumer demand. Apple is also benefiting from a very tenuous preferential tax treatment policy that could dissipate very quickly when Congress goes looking for much-needed revenue to close the budget gap. While much of that $90 billion is long gone for the shareholders of Apple, the company's shortcomings remain.

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.

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