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Carl Icahn Says an Apple Buyback Is a No-Brainer. Or Is It?


Photograph by Jeremy Bales/Bloomberg


Those Apple guys must be idiots. That’s what Carl Icahn says, having bought up more than $1 billion of its shares with the sole objective of having management do the same. With more than $146 billion of cash in Apple’s (AAPL)pocket, using it to buy back shares is a “no-brainer,” Icahn told CNBC.

On one level, a stock buyback is the most indulgent thing a company can do: Take that extra money and buy a piece of yourself. Investors often love it because stock buybacks reduce the number of shares in circulation, which instantly boosts the earnings per share. Theoretically, that should also mean a boost in the share price. Management often likes them because it shows their faith in the future: “Hey, if we’re buying, maybe you should, too.”

Apple Chief Executive Officer Tim Cook pledged in April to buy back $60 billion in shares by the end of 2015 (and raise quarterly dividends by 15 percent, but more on that later).  That’s not good enough for Icahn, who recently pressured Dell (DELL) to do the same thing. If buying back shares is so easy and so great for one’s shareholders, why are these tech leaders dragging their feet?

Well, as my colleague Anand Srinivasan of Bloomberg Industries points out, tech companies have a pretty bad record at boosting their share prices through share buybacks. One reason is that the decision to buy is often based on emotions, not objective criteria. “How many companies think they’re over-valued?” he asks.

The bigger problem is logistical. Only $40 billion of Apple’s cash stockpile is parked in the U.S. The rest is offshore, as is the case with many companies that have extensive global operations and supply chains. Bringing it back to the U.S. has tax implications, which is why folks such as John Chambers have lobbied for a break. Apple could issue debt, but that would have other consequences. In fact, buying stock with after-tax dollars or debt has repercussions that can be less attractive than offloading that cash to investors through dividends.

Then there’s the problem of size. With $60 billion in cash being added to its books every year, Apple would have to buy a lot of stock to please the likes of Carl Icahn. But he’s wrong to say it’s a no-brainer. Everyone knows how much cash Apple has on the books. What investors need now is to hear Cook’s case against a bigger buyback—not that he’s talking to an activist like Icahn.

Brady is a senior editor for Bloomberg Businessweek in New York.

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