Carl Icahn announced Wednesday on Twitter (TWTR), his favorite news distribution mechanism, that he has “purchased $500 million more Apple (AAPL) shares in the last two weeks” and that his investment in the iPad-maker is now worth more than $3 billion. Though the total value of his holdings is still less than 1% of Apple’s $496 billion market capitalization (as of the end of trading Wednesday), the news is making quite the splash.
Having purchased $500 million more $AAPL shares in the last two weeks, our investment has crossed the $3 billion mark yesterday.— Carl Icahn (@Carl_C_Icahn) January 22, 2014
In early December, Carl Icahn released Proposal No. 10, which is a non-binding advisory resolution that the firm complete not less than $50 billion of share repurchases during its 2014 fiscal year (and increase the authorization under its capital return program accordingly). Apple subsequently responded to Icahn’s proposal, and we have reproduced the firm’s counter-argument below (click here for source):
The Board recommends a vote AGAINST Proposal No. 10.
The Board and management team are thoughtfully considering options for returning additional cash to shareholders and are currently seeking input from shareholders as part of the Company’s regular review. The Company’s success stems from the Company’s unique ability to combine world-class skills in hardware, software and services to deliver innovative products that create new markets and delight hundreds of millions of customers. This success has created tremendous value for the Company’s shareholders.
With breakthrough products and services such as the Mac, iPod, iPhone, iPad and App Store, the Company has created huge market opportunities, and the Board and management team believe the opportunities that lie ahead are just as exciting. Given such large and global markets, the Company competes with large companies around the world, many with their own significant technical capabilities and significant capital. This dynamic competitive landscape and the Company’s rapid pace of innovation require unprecedented investment, flexibility and access to resources. Successfully innovating and executing against these large opportunities also requires careful stewardship by the Board and management team, and the Company’s evaluation of capital return is conducted in the context of supporting the Company’s continued business success and desire to deliver attractive returns to long-term shareholders. The Board and management team have demonstrated a strong commitment to returning capital to shareholders over the past two years.
In March 2012, the Company announced a quarterly dividend and share repurchase program totaling $45 billion. In April 2013, the Board authorized a dramatic increase, more than doubling the size of the program to $100 billion, raising the dividend, and increasing the share buyback authorization to $60 billion. As such, the Company is one of the largest dividend payers in the world and has the largest share repurchase authorization in history. The Company has executed aggressively against the capital return program, spending $23 billion of the $60 billion share repurchase authorization in fiscal 2013 alone. These share repurchases have been funded in part by a $17 billion debt offering, the largest ever as of the time of issuance. In the first six quarters of the capital return program, dividend payments and share repurchases totaled over $43 billion. Dividends and share repurchases must be funded by domestic cash, and the Company has returned to shareholders or invested all of the domestic cash generated by its business and raised through the issuance of debt since the beginning of the program.
While the Board and management oppose this shareholder proposal, they are fully committed to returning cash to shareholders. The Board and management team believe that capital should be returned to shareholders on an efficient and sustained basis, and that the evaluation of capital return should be performed regularly and carefully with the best long-term interest of the business and shareholders in mind. The Company is updating perspectives on its capital return program for 2014 and beyond. The Company is collecting input from a very broad base of shareholders, believing that the input of all shareholders is important and should be considered holistically. The evaluation of the capital return program continues to be thoughtful, deliberate, and consistent with a conservative financial policy that supports risk-taking and innovation.
Consistent with its pattern for the last two years, the Company is on track to complete its regular review and thorough analysis and to announce any changes to the current program by March or April of 2014. The Board believes that the Company’s management team and Board are in the best position to determine what is in the best long-term interest of the Company’s business and recommends a vote AGAINST this proposal.
Alongside Apple’s board, Valuentum opposes Carl Icahn’s Proposal No. 10. However, we oppose the buyback as it currently stands only on the grounds that no share buyback program should have a time limit attached to it (please note the “during its fiscal 2014” in Icahn’s proposal). We think the most successful buyback programs are focused on scooping up shares when they are underpriced relative to intrinsic value—the larger the discount the better (see how share buybacks impact valuation here). Firms that buy back stock without a consideration of fair value (i.e. in order to bolster earnings per share) may be destroying value. Said differently, investors shouldn’t buy overpriced stock, and we don’t think a company should either.
Still, Apple’s strong recommendation against the proposal has not stopped Carl Icahn from voicing a response (again via Twitter). The activist investor now plans to offer an in-depth letter soon explaining why he feels the Apple “board is doing great disservice to shareholders by not having markedly increased its buyback.” If Icahn removes the time horizon associated with the share repurchase program and only focuses on a level at which Apple should buy back stock (below its estimated intrinsic value, or below $610 at the time of this writing), we’d strongly consider giving his proposal a “thumbs up.” Apple’s shares are currently trading at $551.51 each, and its shareholder meeting will be held on February 28.
We feel $APPL board is doing great disservice to shareholders by not having markedly increased its buyback. In-depth letter to follow soon.— Carl Icahn (@Carl_C_Icahn) January 22, 2014
Valuentum’s Take
Apple continues to be an underpriced holding in the portfolios of our Best Ideas Newsletter and Dividend Growth Newsletter. We think the company’s shares have both valuation and dividend upside. We’d only be in favor of Carl Icahn’s proposal if it sets a buyback threshold price at our estimate of Apple’s intrinsic value (about $610), a level below which we would be in favor of Apple fulfilling a hefty share buyback program.