Warren Buffett Dumps 13% Of Apple Stake Before $110 Billion Buyback

Berkshire Hathaway owns a big position in Apple stock. On May 4, CEO Warren Buffett announced — while heaping praise on Apple after a weak Q2 report — a giant unloading of the iPhone maker’s shares, reported CNBC.

Is Buffett praising the company to keep the price as high as possible as he unloads more of Apple? It’s hard to tell what he is thinking.

However, with Apple revenues declining and the absence of concrete growth catalysts, the company’s declining free cash flow and limited balance sheet cash raise questions about whether it will issue more debt to help pay for the $110 billion stock buyback.

I requested a comment from Apple and will update this post if I receive a reply.

Meanwhile, after pumping Apple stock during Berkshire Hathaway’s May 4 shareholder meeting, Buffett would be wise to grab the opportunity created by Apple’s stock buyback to sell more of his stake.

Warren Buffett’s Mixed Messages On Apple Stock

Berkshire Hathaway’s biggest individual stock holding has contracted in size during the last two quarters.

After selling 10 million Apple shares in Q4 2023, Berkshire Hathaway’s first-quarter 2024 earnings report released on May 4 revealed a 13% drop in the investment company’s Apple stake — to a value of $135.4 billion — “implying around 790 million shares,” CNBC wrote.

At the shareholder meeting, Buffett praised the iPhone designer — saying it is “extremely likely” Apple will stay Berkshire’s largest holding by year’s end, according to CNBC.

If he is so fond of Apple, why did Buffett sell about 116 million shares in the first quarter? In response to shareholder questions, he suggested he was selling to avoid a higher tax bill in the future if tax rates increase to fund the U.S. fiscal deficit. Buffett told shareholders he was paying a 21% tax rate in 2024 and could pay “a little higher percentage later on,” reported CNBC.

If Buffett was trying to maximize Berkshire’s after-tax proceeds from the company’s Apple stake, the tax rate would not be the only consideration. The direction of the iPhone designer’s stock — which rose 48% in 2023 and has fallen in 2024, CNBC wrote — would be another critical variable for Buffett to consider.

Apple’s Disappointing Q2 Report

This leaves the Oracle of Omaha to answer a simple question: Is Apple stock going higher?

Apple stock seems poised to rise if the company’s quarterly performance and guidance exceed expectations. Apple shares lost 10% of their value in the first four months of the year, which reflects the company’s failure to beat and raise, as I wrote in an April 29 Forbes post.

Nevertheless, I did expect Apple stock to rise — despite reporting disappointing results and guidance — due to a deus ex machina.

That is what happened May 2 as Apple revenue fell by 4% and CEO Tim Cook changed the subject by announcing a big stock buyback and 4% dividend increase.

On May 3, Apple’s $110 billion stock buyback announcement — the largest in the company’s history and 22% more than the year before, noted CNBC — helped send the iPhone-maker’s stock up 7.5%.

Here are the key numbers:

• Q2 2024 total revenue: $90.75 billion — down 4%, $640 million above the London Stock Exchange Group estimate, CNBC reported.
• Q2 2024 earnings per share: $1.53 — down 2% and 3 cents per share above the LSEG consensus.
• Q2 2024 iPhone revenue: $45.96 billion — down 10% and $40 million below the LSEG consensus.
• Q2 2024 services revenue: $23.9 billion — up 14% and $630 million above the LSEG consensus.
• Q2 2024 gross margin: 46.6% — matching the LSEG consensus.
• Q3 2024 sales growth guidance: While Apple did not provide formal guidance, Cook said overall sales would grow in the “low single digits,” CNBC wrote.

Apple struck an optimistic note about the current quarter. The company expects double-digit, year-over-year percentage growth in iPad sales and continued high growth in Apple’s Services division, CFO Luca Maestri said in a May 2 earnings call, noted CNBC.

Apple was excited about the potential for its Vision Pro virtual reality headset. “We’re only scratching the surface there so we couldn’t be more excited about our opportunity there,” Cook told investors. Sadly for investors, “the $3,500 device is expected to sell in low quantities,” wrote CNBC.

Apple also pumped up expectations for the company’s artificial intelligence prospects. “We believe in the transformative power and promise of AI and we believe we have advantages that will differentiate us in this new era,” Cook told analysts in an earnings call.

Can Apple Buy Back Enough Stock To Elevate Its Price?

Since Apple stock could have fallen in the absence of a stock buyback, perhaps the company will need to continue to raise its buybacks in future quarters to offset declining revenue.

In the latest quarter, Apple’s free cash flow fell 45% to $20.7 billion while the iPhone maker ended the quarter with $67.2 billion in cash and short-term investments, according to the Wall Street Journal.

Since Apple’s $110 billion stock buyback exceeds its balance sheet cash, how will the iPhone maker pay for the share buyback?

One possible way to do this is to do what Apple did before — issue bonds to pay for the buybacks and repay the bonds with profits stored in countries with 0% corporate tax rates. “In the case of Apple, the profits are kept offshore in 0% tax countries like Ireland. Then Apple issues bonds in the U.S. to finance these buybacks and when the bonds mature they use the offshore cash to repay them saving the 30% tax rate owed to uncle Sam,” noted a thread on Reddit.

This idea is not completely far-fetched. In 2013, Apple avoided $9 billion in taxes by using the proceeds of a $17 billion bond issuance to pay shareholders rather than bringing back $100 billion in overseas cash where the effective tax rate was 2%, reported the Financial Times.

Apple’s 2013 borrowing cost the company about $310 million annually but would yield an offsetting $100 million in annual tax credits. “There is a huge tax saving for Apple in borrowing the money rather than bringing it back to the U.S.,” Kevin Phillips, international tax partner at Baker Tilly, told the Financial Times.

Whether Apple is still using this tactic to save on taxes is unclear. However, Apple’s latest effective tax rate was 15.8% — a significant savings over the 21% standard federal tax rate — “primarily due to a lower effective tax rate on foreign earnings,” according to Apple’s second quarter 10-Q filing.

While Apple has not reported new bond issuance, the iPhone designer has sold bonds in the past to finance buybacks and dividends. For example, last May, Apple issued $5.25 billion in bonds after a $5.5 billion bond offering in August 2022, reported TheStreet.

One financial expert is comfortable with Apple’s ability to finance stock buybacks. Apple “produces roughly $100 billion per year in free cash flow, and stock buybacks are usually over a longer period of time so as to not cause disruptions in the short-term price,” Babson College finance professor and colleague Mark Potter emailed me on May 5.

There is no reason for Apple not to use its free cash flow for this purpose. “What else are they gonna spend their money on? If they put aside just 1/3 of the FCF for buybacks they can fund it out of operations,” Potter added.

In short, Apple has used a combination of bonds and cash to pay for the stock buybacks and dividends. The company will probably continue with this strategy.

Sadly, Apple’s declining revenue and failure to create world-changing new products suggest the company has lost its ability to invest for growth.

Steve Jobs likely would be rolling in his grave if he could see how far Apple has deviated from his strategy of innovating the company’s way to success.