Originally Posted by daveinpublic
Apples market cap is affected by their own buyout program? Right? Had they not bought back their own shares they'd be higher?
Originally Posted by SpamSandwich
There's no telling since all we really know is where the price is today, but by reducing the number of shares it theoretically drives the price of shares up. Supply and demand.
Originally Posted by anantksundaram
No, it does not. If your argument were true, the optimal strategy for all companies would be to buy out all the shares they can all the time with all the cash they have.
Originally Posted by Sacto Joe
Wrong. Apple is in an unusual position. It's stock is extremely undervalued and it has a ton of cash, with more being generated by the minute. Buying back its own stock is tantamount to investing in itself. The result is to decrease the share count, which increases the potential dividend return of the remaining shares.
Very, very few companies are ever in a position to pull this off.
Edit: There is also the tax issue. When Apple cuts a dividend check, taxes become applicable on the dividend. When it buys back its own shares, there is no tax.
Originally Posted by anantksundaram
You may wish to reread his post a couple of more times to try and understand it. Especially the "theoretically" and "supply and demand" parts.
As an aside, and just so that you are 'theoretically' consistent, I assume you were a fan of iCahn's arrogant assault on Apple, where he went after Apple to not only use up all its cash, but even borrow money, to fund its buybacks?
(Buybacks are obviously more tax-efficient, but taxes are irrelevant to this discussion).
And you, oh supercilious one, may wish to reread the post from daveinpublic to which SpamSandwich was responding a couple of more times to try to understand the complete context. It’s obvious that daveinpublic had the wrong idea. In trying to point out why, SpamSandwich may have over-generalized, but so did you, and he was closer to the mark in the specific instance of Apple than you were.
As regards Mr. Icahn, I’d say he runs a distant second to you for arrogance.
Yes, Mr. Icahn over exaggerated, but the desired effect was achieved: Apple got off the dime and started buying back its own stock in huge amounts.
As regards the borrowing of money, money’s cheap these days. And Apple avoided paying taxes on repatriated income by borrowing that cheap money. Finally, the stock was hugely undervalued at the time. Looked at purely as an investment, and in the context of the time, borrowing that huge amount of money and buying back their own stock at fire sale prices would have been an incredibly smart move. As it was, Apple did indeed borrow money to buy stock, albeit not nearly as much as Mr. Icahn wanted, and it’s worked out very, very nicely for them.
And no, taxes aren’t irrelevant to this discussion, because they aren’t irrelevant to the original question that daveinpublic asked. You may WANT them to be irrelevant, but that’s your problem.
One of the prime drivers for the higher stock price has been the initiation of dividends. The reason this is so is that dividends brought in a completely different type of investor. Interestingly, the huge cash stash that Apple had built up, and continues to add to, was clearly always largely earmarked for the long term investor (via dividends), since far more cash was being generated than Apple needed in its wildest dreams. Yet until they actually started cutting dividend checks, that just hadn’t sunk in.
But the real attraction to long term holders came about when they started buying back their own stock. Long term holders could then see that the growing pie of net income would be getting cut into fewer, ergo larger, slices.
Note, however, that was only true if the pie was actually growing larger, and two years ago the conventional wisdom was that Apple was through growing. That conventional wisdom has now been shown to be a complete fabrication.
As to how taxes fit into this, defraying taxes is just smart business when the money thus defrayed is actually shown to be growing in value. And looking at the price of AAPL, it clearly is growing. If an investor in 2013 got a bigger dividend rather than Apple buying back shares, and the investor needed to sell a share of Apple to pay his dividend tax bill, he would have received $400 for that share. If he were instead to receive that “postponed” dividend today, he would receive over $700 for that same share. True, Apple spent money to acquire those shares. But the money spent was completely offset by the reduction in net shares outstanding.
Next time, anantksundaram, don’t try teaching grandpa how to suck eggs….