The Best Thing Apple Inc. (AAPL) Can Do With its Cash

Unfortunately, Steve Jobs believed the shares were cheap, but he didn’t listen to Buffett. The stock was trading between $200 and $300 per share in 2010, so Apple would have made a fantastic investment buying its own stock that price.  At a P/E ratio below 11, Apple is dirt cheap at current levels, so the market is giving the company another chance to repurchase its shares at a very convenient price; let’s hope Tim Cook doesn’t let this one go too.

Speaking about Buffett, Berkshire Hathaway Inc. (NYSE:BRK.A) provides an excellent model for Apple to replicate when it comes to stock repurchases. The Oracle of Omaha knows a thing or two about capital allocation, and he has designed for Berkshire what is arguably the most efficient and transparent repurchase program around.

Berkshire will repurchase stock under two conditions: the shares must be trading at an attractive valuation – which Buffett has defined as a price to book value ratio below 1.2 – and the company must have more than $20 billion in cash at hand for different uses. This provides clear and objective measures regarding the convenience of the program, and investors in Berkshire can feel comforted on the fact that the company won’t repurchase stock unless it’s in their best interest.

Berkshire’s buyback strategy is simple and smart: if you have more cash than needed, and the stock is undervalued, a buyback is the way to go. Apple evidently has more cash than it could possibly spend, and the stock is trading at historically cheap valuation levels, so there are some fairly strong reasons to put that money to work in an investment opportunity like Apple itself.

Bottom Line

Einhorn is right about Apple’s necessity to put its money to work in something better than low-yielding securities, but considering how undervalued the stock currently is, a buyback should take priority over all other alternatives.

The article The Best Thing Apple Can Do With its Cash originally appeared on Fool.com and is written by Andrés Cardenal.

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