Around six months after first tweeting his admiration for Apple's cash stockpile [5] and a "large position" in the largest company in the world, it would appear every business media's favorite activist is throwing in his chips.
- *ICAHN SAYS NO REASON TO PERSIST WITH APPLE BUYBACK PROPOSAL
Having been there to lift the stock above $500, with it back around $500, and following his recent "add", he now agrees with ISS that there are "other options on the spectrum of allocating capital." Perhaps he read our post on domestic cash over the weekend? [6]
[7]
As Icahn notes, [8]
Dear Fellow Apple Shareholders,
While we are disappointed that last night ISS recommended against our proposal, we do not altogether disagree with their assessment and recommendation in light of recent actions taken by the company to aggressively repurchase shares in the market.
In their recommendation, ISS points out, and we agree, that “on the spectrum of options for allocating capital, the board appears to have been sluggish only in returning excess cash to shareholders,” and even though the company has in place “one of the largest buybacks in history” we agree with ISS that this effort seems “like bailing with a leaky bucket” when “given the scale of the company’s cash reserves.”
That being said, we also agree with ISS’s observation, taking into account that the company recently repurchased in “two weeks alone” $14 billion worth in shares, that “for fiscal 2014, it appears on track to repurchase at least $32 billion in shares.” Our proposal, as ISS points out, “thus effectively only asks the board to spend another $18 billion on repurchases in the current year.”
As Tim Cook describes them, these recent actions taken by the company to repurchase shares have been both “opportunistic” and “aggressive” and we are supportive. In light of these actions, and ISS’s recommendation, we see no reason to persist with our non-binding proposal, especially when the company is already so close to fulfilling our requested repurchase target.
Furthermore, in light of Tim Cook’s confirmed plan to launch new products in new categories this year (in addition to an exciting product roadmap with respect to new products in existing categories), we are extremely excited about Apple’s future. Additionally, we are pleased that Tim and the board have exhibited the “opportunistic” and “aggressive” approach to share repurchases that we hoped to instill with our proposal. It is our expectation that Tim and the board continue to exhibit this behavior as fiduciaries to the shareholders since they clearly seem to agree that our company continues to be extremely undervalued, and we all share a common optimism with respect to the company’s bright long term future.
Sincerely yours,
Carl C. Icahn
Curiously, Icahn pulls out just two days after we reminder [6]everyone that AAPL's buyback capacity is now virtually empty absent more bond issuance or taxable repatriation:
Today, one of the more prominent news releases was that as the WSJ reported overnight [9], 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 [10], $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.
[11]
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.