Apple's (AAPL) Next Capital Return Plan Could Disappoint Due to Timing - UBS

UBS analyst Steven Milunovich weighed in on Apple's (NASDAQ: AAPL) much-anticipated capital return plan, which is expected to be announced in April. The analyst warned investors that the plan could be less than expected due to timing.

"Most appear to expect a large, multi-year program based on rising operating cash flows. However, the story could be more complicate," he said.

He added, "We believe a muted increase and shorter completion period are possible due to potential US tax reform, increased dependence on debt issuance for buyback funding, the stock's higher multiple, and greater domestic capex requirements. The repurchase amount could be as low as $20bn over one year."

Milunovich notes US cash is already drawn down with debt issuance the swing factor. "US cash drawdown, US cash generation, and debt issuance each have supported about one-third of the capital return program to date. However, the US cash drawdown is about complete. We expect US cash generation will be strong, generating about $25bn over the next three years after dividends and M&A to cover repurchases (non-US cash can't be used). The swing factor is debt. Our analysis assumes Apple wants to protect its high-grade rating by keeping debt-to-EBITDA at 1x or less, in which case the share repurchase program could be increased by $50-70bn over the next three years. Of course, Apple could issue more debt in support of a larger program."

The analyst believes Apple's Board may wait for repatriation clarity from the government before making a large move. "Apple may choose a shorter timeframe and lower amount for this return program in anticipation of tax relief. There are various proposals relating to repatriation of foreign profits, which could really benefit Apple given 90% of its cash is overseas. Just considering operating results, we figure FCF available for repurchases could double from $25bn to $50bn over three years. In addition, we would expect Apple to increase its leverage to optimize its tax efficiency"

Despite today's commentary, the firm is positive on the stock and reiterated a Buy rating and price target of $150.00.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $133.00 yesterday.

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