With acquisitions off the table and iPhone sales stalled, analysts now say Apple is preparing a massive stock buyback program

Apple

Luca Maestri, Apple CFO.

• iPhone sales are going nowhere.
• Apple VP Eddy Cue says the company won't be doing any major M&A.
• So how will the company keep investors interested in its stock?
• Analysts think the company could add another $100 billion to its stock buyback program.

On Apple's next earnings call, scheduled for May 1, analysts might be listening more closely to CFO Luca Maestri than CEO Tim Cook. That's because investment bank researchers are starting to speculate about the size of Apple's upcoming stock buyback program.

Complimentary Tech Event

Transform talent with learning that works

Capability development is critical for businesses who want to push the envelope of innovation.Discover how business leaders are strategizing around building talent capabilities and empowering employee transformation.Know More

Apple has been running a $300 billion "capital return program" (which allocates cash back to shareholders in the form of dividends and share-buybacks) for several years now, but the current plan is coming to an end. On the last call, Maestri said a new capital allocation plan would be discussed by the company after it had seen its March quarter results.

The plan could be the juiciest part of the call, because the rest of Apple's business is rather moribund by comparison.

After US President Trump passed a tax cut that allowed Apple to repatriate about $200 billion in cash it was storing overseas with lower-than-usual tax consequences, a lot of people got excited at the prospect of Apple doing something dramatic with that horde. It could acquire Netflix! It could acquire Disney! It could acquire Dropbox!

But in March VP Eddy Cue poured cold water on all that: Apple probably won't do any major acquisitions, he said.

iPhone sales are going nowhere, so what is driving the stock?

In the meantime, Wall Street and City analysts have noted repeatedly that sales of the new iPhone X are not exactly blowing the roof off. A number of them have reduced their estimates of iPhone sales, and they are now expecting flat or even declining unit sales. Apple reported a decline in iPhone sales last quarter, too.

So with neither M&A nor the iPhone driving the stock right now, it is understandable that analysts might conclude that buybacks and dividends are the way that Cook and Maestri will keep investors interested in AAPL.

"When you look at our track record of what we've done over the last several years, you've seen that effectively we were returning to our investors essentially about 100% of our free cash flow. And so that is the approach that we're going to be taking," Maestri said on the last call.

"We currently model a $100 bln incremental total capital returns authorization"

With that as a baseline, Citi analysts Jim Suva and Asiya Merchant have told clients that they believe Apple will add an incremental $100 billion to the capital return program. "Apple surprised many during its last earnings call by stating that it plans to deploy its net cash position toward capital returns and acquisitions," they wrote in a recent note. "We currently model a $100 bln incremental total capital returns authorization to ~$400 bln." They believe 50% of the program will go to share buybacks over two years. That would represent a doubling of the annual buyback rate, the Citi pair say, eventually reducing Apple's outstanding stock by an extra 9.5%. Over the past five years, Apple has reduced its shares by 22% through buybacks, Citi says. They estimate it could add another $18 to AAPL's price.

RBC's Amit Daryanani and his team is also forecasting "a meaningful step-up in capital allocation next quarter": "AAPL is likely to maintain a mix between buyback & dividends while keeping some cash for possible deals. AAPL could target incremental $25B+ buybacks (above repurchases using FCF), implying total share reduction over the next 5 years could be ~1.6B shares (31% share reduction in total, ~7% annually)."