Apple's buybacks exploited stock dips to generate billions in shareholder value

Posted:
in AAPL Investors edited February 2014
Apple's efforts to take advantage of irrational stock dips in order to buy back its own shares at a discount has transferred billions of dollars from panicked speculators to its long term investors.

AAPL last 30 days


In late January, industry analysts incited a stock panic that caused Apple's shares to plunge more than 8 percent after the company released its highest ever quarterly revenues and operating profits, results that the tech media depicted as "disappointing."

Investors who sold as Apple's stock plunged in paper value overnight from $550 to $503 (and then continued to dip below $500 through the end of January) unwittingly found Apple itself to be a willing buyer of the shares they abandoned.

A week into February, the company's chief executive Tim Cook revealed that Apple's executive team had jumped at the rare opportunity and spent $14 billion of its remaining buyback budget to snatch up its shares at a discount.

In comparison to Apple's $158.8 billion in available capital, the price of those recent buybacks might appear to be conservative. However, the $14 billion represented about 40 percent of the $34.4 billion in domestic cash the company reported holding at the end of 2013.

With its stock price then hovering around $500, the late January buybacks would have enabled Apple to grab around 28 million shares. Just over one week later, Apple's stock price has since rebounded to mid-January levels, increasing the impact of Cook's $14 billion buyback by nearly $1.4 billion in just days.

Apple's use of its own cash to buy back shares means that the additional $1.4 billion in value was lost by spooked sellers and effectively credited to the shareholders who remained invested in the company, as the value of the retired shares are absorbed by the remaining shares.

An even greater $16 billion buyback last summer retired 36 million shares at an average price of $444, a purchase that would today cost $3.6 billion more as those shares would each now be worth more than $100 more.

In total, Apple has bought back more than $42 billion of its own shares over the past two years, retiring around 84.5 million shares, or nearly 9 percent of the total shares outstanding when it launched its repurchase program.

Last April, Apple announced an increase of its capital return program, expanding its share repurchase authorization from $10 billion to $60 billion.

"We are very fortunate to be in a position to more than double the size of the capital return program we announced last year," Cook noted at the time. "We believe so strongly that repurchasing our shares represents an attractive use of our capital that we have dedicated the vast majority of the increase in our capital return program to share repurchases."

Apple will again revisit its capital return program in two months, potentially expanding its buyback authorization and or dividend program further, as it has already spent all but $18 billion of its $60 billion stock buyback authorization, a pace well in advance of the original plan to continue buying back shares through the end of 2015.
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Comments

  • Reply 1 of 99
    clemynxclemynx Posts: 1,510member
    Yes, genious move. Hope they do that again every time.
  • Reply 2 of 99

    Carl should be happy.

  • Reply 3 of 99

    the price of aapl shares is so disconnected from fundatmentals that if the outstanding shares dropped by 25%, I wonder if the share price would rise at all.

     

     

  • Reply 4 of 99
    Thus marks the end of the market's stupid phase vis-a-vis AAPL. Value it at what it's worth, or find Apple taking it ever closer to going private. And all those tens of billions in cash generated PER YEAR will go into someone else's pocket.
  • Reply 5 of 99
    sflocalsflocal Posts: 4,614member

    Keep it going Tim Cook. The more the better as far as I'm concerned.  Screw those day-trading a$$h0les.  

  • Reply 6 of 99
    aaronjaaronj Posts: 1,595member
    Quote:

    Originally Posted by sflocal View Post

     

    Keep it going Tim Cook. The more the better as far as I'm concerned.  Screw those day-trading a$$h0les.  


     

    Heck, it's not even the day-trading losers you have to worry about anymore.  So much of the trading is just automated, going second to second.

     

    Though I do agree with you.

  • Reply 7 of 99
    sflocalsflocal Posts: 4,614member
    Quote:

    Originally Posted by AaronJ View Post

     

     

    Heck, it's not even the day-trading losers you have to worry about anymore.  So much of the trading is just automated, going second to second.

     

    Though I do agree with you.




    I understand.  I'm kind of grouping all these wall street gamblers into the same bucket.  Whether mechanized, or some guy day-trading all the time that tries to fortune-tell, they are all responsible for manipulating the market.  



    Those people just try milking a company dry, then move on to the next victim with zero regard to these companies actually trying to make a long-term difference.

  • Reply 8 of 99

    lol. "Irrational stock dips." The market was less than impressed with Apple's performance, and reacted accordingly. That's not irrational, that's the stock market doing its thing. What's "irrational" is Apple saying its stock is worth what it says it's worth. That's not how it works, Tim. If you want to take your ball and go home, that's fine, but this Apple apologist "article" is just silly.

  • Reply 9 of 99
    crowleycrowley Posts: 5,826member
    Quote:

    Originally Posted by aspenboy View Post

     

    the price of aapl shares is so disconnected from fundatmentals that if the outstanding shares dropped by 25%, I wonder if the share price would rise at all.


    If it's Apple buying them then theoretically it shouldn't do, except as a temporary fluctuation because of the trade volume.  Apple's cash is accounted for in the stock price, if Apple use cash to buy stock then the value of the company goes down to the exact same value as that of the shares they buy and retire, i.e. you can't create value from nothing.

     

    In real world practice there are some variations because of changes in expectations, and the aforementioned impact of large trade volumes, but in pure theory of financial transactions buying back shares does not increase the price per share.

  • Reply 10 of 99
    crowleycrowley Posts: 5,826member
    Quote:
    Originally Posted by Sacto Joe View Post



    Thus marks the end of the market's stupid phase vis-a-vis AAPL. Value it at what it's worth, or find Apple taking it ever closer to going private. And all those tens of billions in cash generated PER YEAR will go into someone else's pocket.

    Apple cannot take itself private, a company cannot own itself.  For Apple to go private someone has to buy it, and Apple retiring shares doesn't make that significantly more likely.

  • Reply 11 of 99
    nkalunkalu Posts: 315member
    Smart move. Very smart move.
  • Reply 12 of 99
    Quote:

    Originally Posted by Cash907 View Post

     

    lol. "Irrational stock dips." The market was less than impressed with Apple's performance, and reacted accordingly. That's not irrational, that's the stock market doing its thing. What's "irrational" is Apple saying its stock is worth what it says it's worth. That's not how it works, Tim. If you want to take your ball and go home, that's fine, but this Apple apologist "article" is just silly.


     

    If you look at the picture, you see that the stock price fell, "doing its thing" as you say, for two weeks. That’s irrational. If reasonable investors felt that Apple’s performance made it worth ~8% below where it had been before earnings were announced, then it wouldn’t recover a few days later. That’s panic, irrational selling.  

     

    It wasn’t a mere $14 billion in buybacks that made Apple’s market cap go up by nearly $50 billion. It was a reversal of irrational mistakes made by traders who believed the first rash of knee-jerk reactions to Apple’s earnings data. 

     

    Also, "Apple saying its stock is worth what it says it's worth" is a phrase you need to work on for a while, because those words make no sense. 

  • Reply 13 of 99
    crowleycrowley Posts: 5,826member

    Make perfect sense from here.  Bit of a mouthful, but they make sense.

  • Reply 14 of 99
    starxdstarxd Posts: 128member
    Quote:

    Originally Posted by Cash907 View Post

     

    lol. "Irrational stock dips." The market was less than impressed with Apple's performance, and reacted accordingly. That's not irrational, that's the stock market doing its thing. What's "irrational" is Apple saying its stock is worth what it says it's worth. That's not how it works, Tim. If you want to take your ball and go home, that's fine, but this Apple apologist "article" is just silly.


    I agree this article is silly, but there is absolutely nothing "apologetic" about it.  How you could call him an Apple "apologist" is beyond me.  

     

    You're also wrong about the stock dip not being irrational.  It absolutely was.  Apple had an amazing quarter.  Just because some idiot analysts over-estimated how many iPhones Apple would sell, people freaked out and sold their stock.  It was the ANALYSTS who screwed up, not Apple.  Why is the fact that the analysts got it wrong (as usual) a reason to dump a stock?  It was absolutely idiotic... and if you want proof that it was idiotic, just look at the price of the stock today, three weeks later.  It's right back where it started, which means that all those people who sold at less than $500 are complete morons who lost a bunch of money.  They're almost as stupid as the analysts who led them astray to begin with.  This entire episode was the very definition of irrational investing.  

     

    I've never heard Tim Cook say "Apple stock is worth what I say it's worth."  I have no idea what you're talking about there.  And when did he ever "take his ball and go home"?  Buying stock at a discount from idiots who don't know any better is a very smart strategy.  

     

    But I agree, the gushing, overly biased tone of this article is laughable (although hardly apologetic, as you say).  

  • Reply 15 of 99

    iCon wanted even more.  All he knows is pure greed.  I hope he is satisfied, not that he ever could be!

  • Reply 16 of 99
    Quote:
    Originally Posted by Crowley View Post

     
    if Apple use cash to buy stock then the value of the company goes down to the exact same value as that of the shares they buy and retire, i.e. you can't create value from nothing.

     

    ...in pure theory of financial transactions buying back shares does not increase the price per share.


     

     

    I always thought stock prices were determined by supply and demand.  I never knew.

  • Reply 17 of 99
    starxdstarxd Posts: 128member
    Quote:

    Originally Posted by Crowley View Post

     

    If it's Apple buying them then theoretically it shouldn't do, except as a temporary fluctuation because of the trade volume.  Apple's cash is accounted for in the stock price, if Apple use cash to buy stock then the value of the company goes down to the exact same value as that of the shares they buy and retire, i.e. you can't create value from nothing.

     

    In real world practice there are some variations because of changes in expectations, and the aforementioned impact of large trade volumes, but in pure theory of financial transactions buying back shares does not increase the price per share.


    In simple terms, the total value of the company is divided by the number of outstanding shares, therefore as shares are retired, fewer are outstanding, meaning that each share represents a greater percentage of the company, and is therefore worth more.  That's how retiring shares increases the value of those shares still outstanding.  

  • Reply 18 of 99
    crowleycrowley Posts: 5,826member
    Quote:
    Originally Posted by starxd View Post

     

    In simple terms, the total value of the company is divided by the number of outstanding shares, therefore as shares are retired, fewer are outstanding, meaning that each share represents a greater percentage of the company, and is therefore worth more.  That's how retiring shares increases the value of those shares still outstanding.  


     

    You're right that after a buyback each share is worth a greater percentage of the company, but the value of the company has gone down by the amount of cash they've expended (or the debt they've taken on) to buy back shares.  Owning a bigger slice of a smaller pie.  And the maths work out that the size of the new slice is exactly the same as the old slice.  Of course it is, because you can't create value from nothing.

     

    This is why buybacks are generally only worth doing if you think the stock is undervalued - when the value is eventually realised then each individual shareholder will receive a greater proportion of that value.

     

     

    As mentioned before, this is just theory, in the real world Apple were able to leverage a low interest rate to get credit for the buy back, and made a killing there.  Plus buying back shares shows faith in the company, which can stimulate interest.  And the volumes of trade involved in the buy back will create a brief bubble inflating th value (which itself can have other stimulative effects).

  • Reply 19 of 99

    Apple should have bought the shares when they were cheap and lowered the float permanently (Float is still huge).  They knew what they had in pipeline for years to come/ 

     

    They were scared of rainy day.

     

    Lack of Confidence in their Future products vs Fear!

  • Reply 20 of 99
    mstonemstone Posts: 11,510member
    Quote:
    Originally Posted by Crowley View Post

     
    This is why buybacks are generally only worth doing if you think the stock is undervalued - when the value is eventually realised then each individual shareholder will receive a greater proportion of that value.


    Thanks, all good info, especially for someone like me who is not very involved in stocks and finances. Right now everything I have is in real estate, mutual funds, insurance, 401s and annuities. I used to own AAPL and sold at a considerable profit several years ago.

     

    One question: What relationship does the stock price/market cap have to the actual assets of a company? For example if Apple "theoretically" liquidated all their assets, do you think it would exceed their market cap or is some of the share price reflecting forward looking earnings? Or in Apple's case, is the share price/market cap under valued compared to their actual assets?

     

    Not that I expect them to shut it down and give the money back to the shareholders as in the Michael Dell remarks.

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