Photo: huffpost.com

Photo: huffpost.com

Fortune reports that Apple’s stock repurchase scheme – buying back some of its own shares – is proceeding more than three times faster than scheduled.

The company was scheduled to repurchase 10 million shares in Q3. It bought 36 million […] By my calculation, the company spent $16 billion last quarter ($4 billion in cash, $12 billion through the so-called accelerated share repurchase program) to purchase 36 million of its own shares at an average price of just over $444.

If Fortune‘s numbers are correct, then Apple has already spent almost all of the $17B it borrowed back in April. Accelerating the planned repurchase program makes sense if you expect the stock to cost less now than it will later. In other words, if you’re expecting the stock price to climb … 

stock

If you’re wondering why a company awash with cash (now standing at $146B) would need to borrow money, the reason is tax. The Washington Post figures in the example we quoted back in April are now out of date, but they give the basic idea.

Let’s say Apple borrows money at an interest rate of 3 percent a year (which is more than it would probably pay), and uses it to buy back stock at the current price of about $410 a share. Each share that Apple buys back will reduce its annual dividend obligation by $12.20 a share, at the company’s current dividend rate. The interest on the borrowed money would be $12.30 a share — about the same as the dividend. But interest is tax-deductible, and dividends aren’t.

At a 35 percent tax rate, the borrowed money would cost Apple $8 after taxes for each share it bought back. That’s significantly less than the $12.20 after-tax cost of its $12.20 dividend.

The buyback program thus makes financial sense at pretty much any time, but the accelerated pace suggested by Fortune indicates Apple is very much bullish about its own stock.

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