In Apple’s (AAPL) fiscal Q2, the company bought back shares at its slowest pace in 5 quarters, about $7 billion, bringing the grand total of shares bought back since the start of their $200 billion capital return program in 2012 to $117 billion, and $163 billion including dividend payments.
In the last quarter none of those shares were bought back through an ASR, or an accelerated share repurchase agreement, possibly because of the company’s poor track record over the last year engaging in such transactions and the knowledge that results from the period in question would likely disappoint investors, per Forbes.com:
recently completed accelerated stock repurchases are yet to pay off. Apple closed an about $6 billion accelerated share repurchase (ASR) in July at prices above $124 a share. Last February, the company closed an about $9 billion ASR at an average price above $110
Outside of open market repurchases that the company executes on a planned basis, the ASRs take place when the company wants to be opportunistic, when they perceive the stock to be cheap, not merely a function of their established program.
Which leads me to some some of the options activity in AAPL today, where some very large delta one trades occurred in the market:
So what happened here? The buyer created what appears to be a risk-less transaction as the long stock is covered by long in-the-money puts and short out-of-the-money calls, matching up the deltas. A long put position and a short call position of the same strike and maturity is essentially a short forward contract on that stock (read here for more on Forward Contracts). What could be the rationale for this offsetting transaction of long stock/short forward? It could be a bank locking in funding for the long stock position at a cheaper rate than the bank charged a client for funding a similar position. And the client? That might just be Apple itself.
The point here is that this activity suggests that a large bank has entered into an ASR program with AAPL whereby the bank(s) have committed to delivering a specified amount of shares to the company in a certain amount of time at a sort of average price during the period.
Why is the options activity the tell that AAPL is conducting an ASR? Well, if you were a large bank out there buying AAPL’s stock, you have very little risk and you are getting paid handsomely to do this business, but there are also potential little tricks that can make the activity more profitable for the bank.
We highlighted similar options activity back in early February 2014, after the stock was down sharply following earnings disappointment and continued to trend lower (lower left below):
At the time I opined….”maybe, just maybe AAPL is front running Carl Icahn’s request for increased capital return”.
This time around, maybe Warren Buffet’s Berkshire Hathaway’s announcement of their purchase of $1 billion of AAPL stock in the March quarter was timed to add some added juice to the ASR. We won’t know until we know whether or not the company is buying in ASR, but it would certainly help explain the $10 run since the stock dipped below $90 for the first time since June of 2014, on May 13th. I might not place too much emphasis on an ASR if it was the case, remembering the company bought $6 billion in a similar fashion some 25% higher last summer, and in some ways it could be viewed as a negative as they, and Buffett were the buyers of last resort.