Apple Investors Happy Icahn Has Called His Dogs Off

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On November 14, 2013, Icahn Associates filed its Form 13F with the U.S. Securities and Exchange Commission. This Form 13F listed out the Icahn investment vehicle holdings as of September 30, 2013. The report immediately sent Silicon Valley and Wall Street commentators into a frenzy, as it revealed that Icahn had purchased 3,875,063 shares of Apple (NASDAQ:AAPL) stock during the summer quarter. At that time, Icahn and his affiliates held $1.8 billion worth of Apple shares, which also calculated out to less than 0.5 percent of the consumer electronics company.

Still, Icahn felt well within his rights to launch a public campaign calling for Apple to improve shareholder returns through financial engineering. After a dinner meeting with CEO Tim Cook, Carl Icahn took to Web 2.0 and attempted to browbeat Apple to immediately purchase $150 billion worth of its own stock. Last February, titans Icahn and Cook effectively negotiated a compromise, as Apple accelerated its original buyback plan through a market correction. For now, Wall Street traders appear pleased that Carl Icahn, billionaire activist investor, has called off the dogs at Cupertino.

Carl Icahn’s Original Plan for Apple

Apple financial managers are tasked with making decisions upon whether to retain earnings and reinvest into the business, or to return capital back to shareholders through dividends and buybacks. Technology firms and expanding concerns typically retain the majority, if not all of capital in an attempt to better reward investors through long-term share price appreciation. Alternatively, mature businesses, such as utilities, return the majority of profits back to investors because these companies lack real growth opportunities. Apple, of course, was largely hailed as a growth company throughout the days of the late Steve Jobs. In recent years, Jobs and Apple brought the revolutionary iPod, iPhone, and iPad platforms to market. On July 24, 2012, Apple actually paid out its first dividend in seventeen years.

The initial saber rattling out of Carl Icahn may suggest that the billionaire investor believed Apple’s growth story had already come to a close. Again, Carl Icahn’s original plan called for Apple to immediately purchase $150 billion of its own stock. Last October, Icahn addressed a letter to Tim Cook through his Shareholders’ Square Table website, where the wealthy investor portrays himself as a Robin Hood type character. Icahn then proposed a $525 per Apple share tender offer out of Cupertino, which was to be financed through both cash and debt. Icahn also presented back-of-the-envelope calculations that amounted to 33 percent price appreciation in shares, if Apple were to have committed to his ambitious buyback plan. Carl Icahn, in fact, went so far as to suggest that his $150 billion buyback proposal be put up for non-binding shareholder vote.

Apple, for its own sake, had already pledged to return $100 billion back to shareholders via buybacks and dividends by the end of 2015. Last April 2013, Apple sold $17 billion worth of bonds to help finance these ongoing series of buyback and dividend transactions. Powerful investors including Bill Gross and the California Public Employees’ Retirement System (CalPERS) recently went on record in support of Apple. Ann Simpson, CalPERS portfolio manager, ripped Icahn for his “megaphone diplomacy.”

Apple Accelerates Buybacks

Apple filed its Q1 2014 report with the Securities and Exchange Commission on January 27, 2014. Be advised that Apple’s first fiscal quarterly period ended upon December 28, 2013. Apple’s Q1 2014 earnings call is always a highly anticipated event because this quarter largely coincides with the Holiday Season. Apple recorded record unit sales of 26 million iPads and 51 million iPhones during its latest Q1 2014. In all, Apple generated $13.1 billion in net income off $57.6 billion in Q1 2014 total net sales. Apple closed out its Q1 2014 earnings call forecasting Q2 2014 revenue to fall between $42 billion and $44 billion. Last year, Apple posted $43.6 billion in Q2 2013 revenue. Wall Street traders effectively took Apple’s flat revenue projection for an earnings warning and promptly sold off stock from $547.22 to $503.49 the day of the earnings call. From there, Apple shares were to ultimately establish a multi-month low at $493.55 on January 31, 2014. Apple shares were to rebound sharply above $530 heading into March of this year.

Tim Cook admitted in his February 6 interview with the Wall Street Journal that Apple had bought back $14 billion worth of its own stock within the two weeks following the Q1 2014 earnings call. Cook used the words “surprised, aggressive, and opportunistic” to summarize Apple’s accelerated buyback response to the aforementioned 8 percent correction in shares. Cook broke down the accelerated buyback program into $12 billion from institutional investors and $2 billion via open market transactions.

The $14 billion in accelerated buybacks were actually a part of Apple’s original plan to return $100 billion in capital back to shareholder by the end of 2015. Still, the accelerated transactions emerged as the primary factor behind Icahn’s ultimate decision to drop his own $150 billion buyback proposal. In a stroke of genius, Tim Cook was to return capital to shareholders, reiterate his commitment to growth, and maintain control of his empire without kowtowing to pressure from Icahn.

According to Carl Icahn, Apple remains a “no brainer” as a long-term investment.

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