Apple is a 'free cash flow machine' and that's why you should buy its stock: analyst

Brian Sozzi
Editor-at-Large

Sorry GE (GE), but Apple (AAPL) is the new widows and orphans stock.

Investors shouldn’t buy Apple’s stock because a 5G iPhone may arrive in 2021 or the new Apple TV+ will suck in a massive number of subscribers when it debuts this fall. Nope, buy Apple because it wants to give away all its cash to shareholders mostly through an earnings-boosting stock buyback plan, says one veteran tech analyst.

“We think that is part of the bull case on Apple,” CFRA analyst Angelo Zino said on Yahoo Finance’s The First Trade when asked if the tech giant’s financial engineering on buybacks is a good thing for investors. “What we love about the Apple story is that you have a great management team there and two, they are an absolute free cash flow machine.”

Vino added, “Yes, they are aggressively buying back shares — but if you think about it, all that cash they have generated over the last decade that has been sitting on the books is cash that belongs to the investor.”

The free cash flow machine that is Apple certainly did its thing in the most recent quarter.

Apple said Tuesday evening that it ended the third fiscal quarter with $211 billion in cash plus marketable securities. Net cash — which backs out Apple’s $108 billion in debt — stood at an impressive $102 million. Apple put that cash to work in the quarter, to Zino’s point. The company returned over $21 billion to shareholders through a combination of buybacks ($17 billion) and dividends ($3.6 billion).

For the nine months ended June 29, Apple has repurchased a colossal $49.5 billion of its stock.

Apple wants to be cash flow ’neutral’

The company’s chief financial officer, Luca Maestri, reiterated to analysts on a conference call that Apple wants to be cash flow “neutral” over time. Apple can mostly get to that point by continuing to aggressively buy back its stock and pay out dividends.

Just in April, Apple raised its stock buyback plan by $75 billion and hiked its dividend by 5%.

And if it does accelerate its stock buybacks — which has the effect of boosting earnings per share — Apple could surprise a lot of folks come earnings reporting time even if iPhone sales stay stagnant.

“With the annual free cash flow the company is generating, Apple would have to repurchase significantly more shares than what is currently built into our model in the coming years to reach a net cash neutral position, suggesting our EPS estimates for FY20 & '21 may prove overly conservative,” wrote Piper Jaffray analyst Michael Olson in a note to clients.

Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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