Steve Jobs Wrong About Stock Buyback Impact

Reports out of the Apple (AAPL) shareholders meeting today are not very encouraging if you are an investor in the company. One of the first questions posed to Steve Jobs during the Q&A session, the first Jobs has attended since his medical leave of absence, concerned the odd decision made by the company to sit on a cash hoard of about $40 billion, earning little or no interest.

Apple has previously taken the position that keeping cash on-hand for acquisitions or large research and development projects made sense. I can buy that for the first $10-$15 billion, but the kind of cash balance held today is not only silly, but a disservice to investors.

So how did Jobs answer when shareholders asked about the possibility of using some cash for a dividend or stock buyback plan? Not well. Jobs said that not only does Apple need to keep that cash for growth opportunities, but even more disturbing, he stated that paying a dividend or buying back stock would not change the stock price.

Given that Peridot Capital has a position in Apple stock, this comment is not only wrong, but it indicates to me that Jobs does not really care about shareholders very much. He is right that paying a dividend would not change the stock price. A dollar of cash is worth the same on Apple’s balance sheet as it would be in the pocket of a shareholder, so any transfer of cash from the company to investors would serve merely as a partial cash out of one’s investment (and would possibly be taxable for the investor).

To assume the same for a share repurchase plan, however, is simply incorrect. Apple could retire 10% of the company’s outstanding shares and only use half of its unused cash balance! How can Jobs argue that a 10% increase in Apple’s earnings per share would not positively impact the stock price? That is exactly why companies use free cash flow to repurchase shares; each investors’ share of the ownership pie increases, which makes each share of stock more valuable.

For those of us hoping Apple would boost earnings by investing its cash hoard more wisely, it appears our voices won’t be heard anytime soon. Unfortunate, but true.

Full Disclosure: Peridot Capital was long shares of Apple at the time of writing, but positions may change at any time