Today, one of the more prominent news releases was that as the WSJ reported overnight, AAPL had repurchased on an accelerated basis some $14 billion of its shares in the past two weeks, following the constant Tweeted proddings of Carl Icahn, and the market responded by rewarding the stock and pushing it 1.4% higher. There is, however, a flip side to this artificial boost in the company’s EPS calculation: a plunge in the company’s domestic cash.
As everyone knows, AAPL is still a cash cow, and in the last quarter following the release of its latest iPhone and iPad, it generated a bumper $12 billion in cash. The only problem is that this is global cash, and as the company’s 10-Q indicates, $13.1 billion of this cash was generated and held offshore, which means that AAPL’s domestic cash declined by $1.1 billion. In fact, as the chart below shows, this was the 4th consecutive quarter in which AAPL’s domestic cash has declined offset by a massive cash build offshore. And a reminder, “Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.” This also means that unless AAPL repatriates some of its offshore cash, and unless it issues even more debt, its stock buybacks and dividends are limited to the declining cash amounts held in the US.
So if one were to extrapolate AAPL’s Q1 domestic cash simply by subtracting the reported $14 billion used in the stock buyback from its December 31 US cash holdings, as of today, all else equal, AAPL now has “only” $20.4 billion in cash held domestically – an amount that matches its domestic cash holdings last seen in September 2010.
Which suggests that after having yielded to Icahn and successfully defended the $500 level by aggressively buying back its own stock in the last two weeks, AAPL’s dry powder for future buybacks is now running dangerously low.
The implication is two-fold: going forward, AAPL’s discretionary stock buybacks will be far, far less active as the company will seek to preserve a cash buffer, especially if it wishes to engage in domestic M&A and to preserve liquidity for future dividends. Alternatively, it is becoming increasingly likely that just like in 2013, AAPL will once again be forced to access the debt markets in order to raise its domestic cash level to a point where it will once again have a comfortable cash balance with which to repurchase its stock.
So if indeed Icahn has gotten deep under the skin of Tim Cook, look for AAPL announcing a bond issue in the not to distant future, as it continues to lever itself up merely to placate some of its more vocal activist shareholders (or, improbably enough, repatriating some of its offshore cash at a huge tax hit to the company – something it did not do last time it issued debt, and something it almost certainly won’t do this time around).
Alternatively, if there is no debt issue, expect that any aggressive future stock buybacks by Cook’s management team will trickle to next to nothing, at which point it will be just the market’s buyers negotiating with the market’s sellers, without the benefit of tens of billions in additional stock purchases by the company itself.
Whether this means that the stock, which got its euphoric boost today on the buyback news, will now drift lower as the price is set purely by the market will likely be seen in the coming week, although should the Fed also fold and once again taper the taper, thus lifting all boats in confirmation that even the most modest pullback in the S&P is enough to get it back into activist mode, then all bets are off.