Why Apple’s CEO May Want to Think Twice About a Buyback

Bigger stock buybacks like the one Carl Icahn is urging Apple Inc. Chief Executive Officer Tim Cook to adopt don’t always have the desired effect.

Technology companies have a poor record of producing returns through share-repurchase programs, according to research by Bloomberg Industries. The cost of the buybacks rarely is matched by corresponding increases in market value, an analysis of six U.S. technology companies with buybacks found.

Icahn, who invested about $1 billion in Apple over the past month, said this week that he wants the world’s most valuable technology company to increase its buyback program to boost the share price. While some shareholders may welcome such a move, stock gains are tied more to the release of hit products, said Walter Piecyk, an analyst with BTIG LLC in New York.

“What’s more important to the stock is delivering products that are going to return the company to earnings growth,” he said. “If the company can’t return to earnings growth, share repurchases alone won’t make this a great stock to own.”

In examining buyback programs instituted since 2007 by Hewlett-Packard Co., Dell Inc., Intel Corp., Qualcomm Inc., Texas Instruments Inc. and Broadcom Corp., only Qualcomm’s gained more than what was spent on the buyback plans when including the cost of equity, said Anand Srinivasan, an analyst with Bloomberg Industries. Qualcomm was particularly good at buying when the stock was low, he said, while others typically used the strategy to signal confidence in the company’s future, he said.

Buyback Hurdles

“How many managements believe that their stock was overvalued,” he said. “To do it effectively, you have to do it like a portfolio manager.”

Funding the buybacks also creates hurdles, Srinivasan said. Companies such as Apple must either pay taxes to transfer the money from overseas accounts or borrow it, and the resulting gains are rarely worth those expenses, he said.

Buying back shares can help a company improve its earnings-per-share performance, said Piecyk. Apple last quarter exceeded his profit target by 22 cents a share, partially because the company had repurchased more shares than he expected, decreasing how many were available on the market. Those gains are often short-lived, he said.

“You’re propping up the stock,” he said.

Lackluster Profits

Apple’s profit growth has stalled without the introduction of a new product. Net income fell 22 percent last quarter and 18 percent in the three-month period before that.

If Apple’s new products are hits and the stock rises, Icahn may not be confrontational with CEO Cook about a buyback. A person with knowledge of Icahn’s plans said the investor views his Apple stake similarly to his position in Netflix Inc.

In that case, Icahn invested in Netflix in October 2012. Since then, the company’s shares have more than doubled. Icahn said he won’t demand a seat on Netflix’s board or sell his stake.

“When you make $600 million to $700 million, you don’t punch the CEO in the face,” Icahn said at the time.

Apple announced an expanded buyback program in April that will total $60 billion by 2015. It bought $16 billion worth of shares last quarter. Icahn is advocating that Apple allocate $150 billion for a repurchase, according to a person with knowledge of his ideas.

Investor Support

Even without a program favored by Icahn, Apple is regaining some of its luster with investors. Hedge funds including Leon Cooperman’s Omega Advisors Inc., Renaissance Technologies LLC, D.E. Shaw & Co. and Essex Investment Management Co. disclosed in filings that they bought Apple shares last quarter.

Omega Advisors, with about $8.9 billion under management, added 31,000 Apple shares valued at $12.3 million, while Essex added 14,095 shares worth $5.6 million. Renaissance Technologies, the $22 billion investment firm founded by Jim Simons in New York, added 714,487 shares, with a market value of $283.3 million. D.E. Shaw bought 1.84 million Apple shares and had a stake valued at $1.4 billion at the end of the quarter.

David Einhorn, the head of hedge-fund Greenlight Capital who pushed Apple earlier this year to return more money to shareholders, maintained his stake valued at $951 million last quarter.

Apple, based in Cupertino, California, rose 1.8 percent to $498.50 in New York yesterday, its highest price since January. While the company is down 6.3 percent this year, the shares have gained 16 percent since the beginning of March.

Investors are buying Apple stock just ahead of a batch of product announcements. The company on Sept. 10 is poised to unveil its latest iPhone, followed later in the year by new iPads. The two touch-screen products account for nearly 70 percent of Apple’s sales.

“We’re about 30 days away from the start of product announcements and that’s what most important to the stock,” said Piecyk. “It’s easy to buy it now.”

Before it's here, it's on the Bloomberg Terminal.