I’m not a big fan of buybacks, in all honesty. However, this is a brief piece showing the [potential] tangible value-add buybacks give to a company over the long term. I’m going to be using Apple ($AAPL) as an example.
While everyone knows a company buys back their stock to “make the most opportunistic investment by investing in themselves”, which is typically the most corporate bullshit you will hear, companies can achieve a second benefit. Repurchasing shares of the stock reduces the amount of shares outstanding, allowing the company to pay less in dividends over time. Even though the quarterly dividend rises every year, Apple doesn’t have to pay dividends to themselves. Apple effectively pays less directly to shareholders and buys back their “undervalued” (Cook’s words, not mine) stock, which would hopefully appreciate over time.
Let me just illustrate that, as the above paragraph was a bit wordy and basic:
In a year’s time, Apple’s dividend remained the same but their amount paid to shareholders decreased in total every quarter. As I said, less shares on the market to pay to. That being said… Apple raised tens of billions of dollars in debt to return capital to shareholders. Apple only saved $118M in that fiscal year. It’s only common logic that they are indeed betting on their stock price to appreciate over the long-term. Saving money on the dividend payments clearly isn’t their goal, as they would stop raising the distribution every year.
Does that mean the buyback is worthless? Well, we’ll really need to wait longer-term to find out. In the short-term, however, we have a few stats to run with. Since 2015 began, Apple has spent $49.026B on share repurchases. Since their stock hit all-time highs, the company has lost $250B in market cap. Without the buybacks, would the stock have declined $300B in market cap to this day? There simply isn’t enough evidence to support the claim that it would have. If Apple was able to repurchase that amount of stock without issuing a tremendous amount of debt, I think it may have been justifiable to the majority of investors. However, Apple’s buyback may go down as one of the largest misuses of capital ever if it remains a value stock forever. If Apple’s stock price kept appreciating, though? They’d look like geniuses.
For more shit-talking on companies who clearly don’t know what they’re doing with their buybacks and dividends, see: Special Dividend Killer
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