Apple's $110 Billion Share Buyback

Apple’s $110 billion share buyback program has captured significant attention from investors, and with good reason. This massive repurchase of its own shares is a strategic move to support its stock price. Even as Apple’s growth shifts from hardware products like iPhones and Macs to services such as cloud computing and artificial intelligence, the company continues to generate substantial free cash flow (FCF). This steady cash generation allows Apple to execute its buyback plan, making the stock appear undervalued when assessed through the lens of FCF utilization.

Understanding Apple's Free Cash Flow

Despite a slight decline in revenue (4.3%) and net income (2.2%) in a recent quarter, Apple remains a “cash cow,” consistently producing significant FCF. Interestingly, even with these negative growth metrics, earnings per share (EPS) rose by 0.3%, primarily due to Apple’s aggressive share buybacks, which reduced its total share count by 2.42%. On May 2, Apple announced its $110 billion share buyback program, which it can easily afford. Over the 12 months leading up to March 31, 2024, Apple generated $103.9 billion in FCF, using $81.8 billion—78.7% of its FCF—on share repurchases.

This buyback strategy demonstrates that Apple has both the financial means and the intent to reward shareholders. Going forward, the company is expected to generate approximately $111 billion in FCF by the end of the next fiscal year, potentially increasing its buyback spending to 85% of FCF, or $94 billion. In some cases, Apple has even spent more than 100% of its FCF on buybacks, drawing from cash reserves or borrowing to finance these efforts.

Projected Future Free Cash Flow and Buybacks

Looking ahead, Apple’s FCF projections remain strong. By applying Apple’s historical operating cash flow margin to analysts' revenue estimates, we can project FCF growth. With a 29.2% operating cash flow margin over the past 12 months, Apple’s FCF could rise by 2.7%, reaching $104 billion in the current fiscal year and $110.8 billion by 2025.

These projections indicate that Apple will comfortably support its $110 billion buyback program, even if it takes more than a year to complete. The company’s ability to generate immense cash flow—despite expected revenue growth of only 1% this year and 6.2% next year—will allow it to continue funding significant buybacks, which in turn helps support its stock price.

The Impact of Share Buybacks on Stock Price

Apple’s buyback program isn’t just a way to return cash to shareholders—it also directly influences the stock price by reducing the number of outstanding shares. Over the past two and a half years, Apple has reduced its share count by 2.4% to 3.2% annually, with an average decrease of 2.53% over the 12 months ending March 31, 2024. Looking ahead, Apple’s ongoing buybacks could continue to reduce its share count by 2.53% to 2.73% annually.

Over a longer period, this reduction becomes even more significant. If Apple maintains its current buyback rate, its share count could drop by 28% to 31% over the next decade. A lower share count increases EPS, a key metric investors use to evaluate stock performance, which in turn supports a higher stock price.

Valuing Apple's Stock Price Based on Free Cash Flow

One method to assess Apple’s future stock price is by evaluating its market value based on FCF yield. A 3% FCF yield suggests Apple’s market value could reach $3.6 trillion, about 23% higher than its current market cap of $2.91 trillion. This would imply a stock price of approximately $233.79 per share, up from its current level. Using a more conservative FCF yield of 3.33% still projects a stock price of $210.43, a 10.8% increase.

On average, these valuation methods point to a stock price target of around $222.11, representing a 17% increase from Apple’s current price. Factoring in the expanded $110 billion buyback program could boost the stock price by an additional 2.5% to 5%, potentially increasing the total projected rise to 22%.

Why Apple's Buyback Strategy Works

Apple’s $110 billion share repurchase program is a strategic move designed to enhance shareholder value and support its stock price. Despite slowing revenue growth, Apple’s ability to generate massive free cash flow allows it to continue executing these buybacks. The reduction in outstanding shares boosts EPS, contributing to stock price appreciation.

With a strong cash position and continued FCF generation, Apple is well-positioned to sustain its buyback program while maintaining financial flexibility. Given the potential for the stock to rise by at least 17%, and possibly as much as 22%, Apple appears undervalued when viewed through the lens of FCF. For investors seeking a combination of income through dividends and capital appreciation through share buybacks, Apple’s stock remains an attractive investment. As the company continues generating cash and repurchasing shares, its stock price is likely to climb, making this buyback program a powerful tool for long-term value creation.