Analyst: Apple's Stock Price Makes Share Buyback Make Sense

Now is an ideal time for Apple to make a significant stock buy-back effort, according to Bernstein Research analyst Toni Sacconaghi. The analyst said that a stock buyback effort of US$10 billion could raise Appleis earnings per share (EPS) by 4%, and that $20 billion spent in a buyback effort that was completed y the first quarter of 2009 could boost EPS by as much as 15%.

Mr. Sacconaghi said the confluence of a relatively low P/E ratio of 18 (at the time of his report -- itis currently 20 as of this writing) combined with Appleis enormous cash holdings of more than $25 billion makes a buyback make sense.

"Mathematically," he said in a research note to clients, "share buybacks boost EPS only if a stockis P/E multiple is lower than the reciprocal of the after-tax interest rate earned on cash."

In other words, if the increase in EPS from a stock buyback would net more than the interest rates the company could otherwise earn on its cash holdings, the buyback would be profitable for shareholders. In Mr. Sacconaghiis analysis, he assumed a 1.55% ROI on Appleis cash holdings and short term investments.

He also posited that boosting EPS makes more sense than a major acquisition, paying a dividend, or allowing the cash holdings to grow so large that Apple become a target for corporate raiders.

"We do not believe there are any large companies that shareholders would view to be complementary to Apple, given Appleis unparalleled innovativeness," he wrote.

Apple has historically said that it maintains a large cash balance to put the company in a position to make strategic investments. Apple has purchased software projects, hardware companies, and other companies during the past 10 years, all made possible by having a ginormous stack of cash that has grown larger than Microsoftis own cash holdings.

Other analyst and pundits have called the current economic crisis as a major opportunity for healthy companies to make acquisitions, allowing them to buy up newly less-expensive companies. Layoffs at many large companies have also been called an opportunity for those healthy companies to go headhunting.

Be that as it may, Appleis track record is to be mum on its plans until CEO Steve Jobs is ready to tell the world what his company has already done.

In the afternoon trading session on Wednesday, Apple is trading higher at 107.05, a gain of 7.14 (+7.15%), on moderate volume.

*In the interest of full disclosure, the author holds a small share in AAPL stock that was not an influence in the creation of this article.  

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