Apple expected to add up to $100 billion to buyback program while many companies halt repurchases

By Emily Bary

Analyst says it’s ‘a logical decision given how attractive the current stock price is

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At a time when many companies are suspending their buyback programs due to the COVID-19 outbreak, Apple Inc. is expected to remain aggressive.

Two analysts Wednesday said the company is likely to add up to $100 billion to its buyback authorization next week. Apple AAPL, -0.38% has historically made updates to its capital-return program in conjunction with its March-quarter earnings report.

The timing of the announcement is somewhat awkward amid heightened attention on share-repurchase programs during the pandemic. Companies like Intel Corp. INTC, -1.76%, Chevron Corp. CVX, +2.79% and the big banks have paused their buyback programs. The stimulus bill that passed in March forbids companies that take aid from repurchasing stock until a year after they’ve repaid their loans.

Read: Disney buybacks may be on pause until 2023, Citi says

Apple has about $100 billion in net cash and the company has set out to become net-cash neutral “over time.” Though some investors have called on the company to make flashy acquisitions, Apple has mainly sought to accomplish its target through capital returns.

The company “will likely announce an authorization for $75 billion to $100 billion in buybacks” and a 4% to 7% dividend increase, Evercore ISI analyst Amit Daryanani wrote in a note to clients. He called this “a logical decision given how attractive the current stock price is.”

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He expects the company will keep its skew toward buybacks given that its large market value makes it difficult for Apple to offer an overly attractive yield.

“In the two years since announcing its ‘net-cash neutral’ plan, Apple has returned ~135% of free-cash flow via buybacks (115%) and dividends (~20%),” he wrote. “The returns in excess of free-cash flow have reduced net cash by ~$50 billion over two years and we expect this trend to continue with net cash falling by ~$25 billion per year over the next 4 years.”

Bernstein’s Toni Sacconaghi took a similar view as he also told clients to expect a boost of $75 billion to $100 billion in Apple’s buyback authorization when the company posts results next Thursday.

“We note that our recent analysis suggests Apple’s current buyback model is sustainable until the end of FY 2023 – at which point, Apple will have likely repurchased ~40% of its shares outstanding from its peak,” he wrote.

See also: Can Apple make new iPhones while dealing with coronavirus, and who will buy them?

Sacconaghi estimates that the company “could probably extend its program by an additional ~3 years if it takes on net debt, i.e. $100 billion, levering up to ~1.3x net debt to Ebitda.” He argued that the company seems able to generate 5% to 6% growth in earnings per share “from buybacks alone” for the next four to seven years.

He rates the stock at market perform with a $285 target price.

Apple shares are up 3.2% in Wednesday trading, but they’ve lost 13% over the past three months as the Dow Jones Industrial Average DJIA, +0.16%, of which Apple is a component, has declined 19.4%.