Battle of the billion dollar buybacks: Apple, Inc. vs Microsoft Corporation

Posted:
in AAPL Investors edited January 2014
Over the past fifteen years, both Apple and Microsoft have invested in Apple, while Microsoft has also invested in itself. Here's a look at how those investments worked out, with particular attention to stock buybacks, a panacea certain billionaire investors are prescribing for Apple.


Apple Holdings


Source: Quartz

Apple invests in AAPL

A decade ago, Steve Ballmer's Microsoft's demonstrated no faith in Steve Jobs' ability to turn Apple around, effectively walking away from an $11.5 billion opportunity.

However, in 1999, just as Microsoft was getting ready to bail out of its purported "bailout," Apple's board of directors authorized its executives to perform up to a $500 million stock buyback. Apple's shares were around a split-adjusted $10 per share, but shot up to $34 per share at the height of the 2000 dotcom boom before crashing back down to around $10, territory where it remained for the next three years (below).

AAPL stock
Apple's dotcom boom. Source: Google Finance


By 2003, Microsoft had sold its remaining AAPL shares while Apple had acquired 6.55 million of them for $217 million under its stock repurchase plan, or about $16.50 each relative to today's share price. At the end of that year, it looked like Microsoft had been smart to get out when it did, while Apple's buyback appeared ill-timed.

Following Apple's 2005 stock split and rapid growth since, the current value of those shares today would be about $6.6 billion, representing a 3000 percent return on investment, even though today's shares are down from their 2012 peak by nearly 29 percent.

Under its then chief financial officer Fred D. Anderson, Apple essentially reinvested a fifth of its $1.1 billion ARM Holdings windfall from the 1990s into itself, leveraging, on behalf of its shareholders, one of the highest returns on investment possible in the 2000s.

Apple grows a cash pile as Steve Jobs defends "thinking big"

In 2010, some Apple shareholders were upset to hear Steve Jobs rebuff their desire to have the company distribute its $40 billion in cash via either a stock buyback or dividend plan.

Jobs explained Apple was holding the cash for future growth opportunities, and said that buybacks or dividends were unlikely to have any significant affect on Apple's stock price, an idea many shareholders and analysts scoffed at. "When you take risks, it's like jumping in the air. When they don't work out, it's nice to know the ground is always there" - Steve Jobs

Distributing Apple's cash, Jobs said, would leave it without the capital it needed to do "big" things, and after the cash was gone, he pointed out, there would be no big pile of assets to resist the market's efforts to devalue Apple into oblivion.

"When you take risks, it's like jumping in the air. When they don't work out, it's nice to know the ground is always there," Jobs told Apple's shareholders. Cash was Jobs' bulwark against outsiders seeking to destroy the company's stock price in order to buy up the company for salvage.

Interestingly, a report by Reuters noted at the time that "Jobs offered few details on the iPad" that had been newly announced but had not yet gone on sale, adding that the "tablet computer is trying to bridge the gap between smartphones and laptops, but consumer demand for a 'third category' of devices remains unclear."

As it turned out, iPad quite clearly helped contribute to Apple's bottom line. Over the past three years, Apple's cash holdings grew from $40 to over $140 billion, leading its chief executive Tim Cook ready to admit that Apple now had more cash than it needed to operate, even if it continued to think big.

Apple again invests in AAPL

In March 2012, Cook stated "we have used some of our cash to make great investments in our business through increased research and development, acquisitions, new retail store openings, strategic prepayments and capital expenditures in our supply chain, and building out our infrastructure.

?Even with these investments," he added, "we can maintain a war chest for strategic opportunities and have plenty of cash to run our business. So we are going to initiate a dividend and share repurchase program.?

Apple's chief financial officer Peter Oppenheimer outlined a three year plan to use $45 billion of Apple's domestic cash to pay dividends and initiate a $10 billion share repurchase starting in 2013.

AAPL stock
Source: Google Finance


At that point in March (the starting point above), Apple's shares were valued at $585. Prior to the start of 2013, Apple's stock subsequently hit $700 in September but then crashed. Apple took advantage of the panic by buying up 4.1 million shares for $1.95 billion, at an average share price of $478.20 during the first calendar quarter of 2013.

Apple invests even more in AAPL

The company then increased its upper limit of its buyback program by $50 billion in April 2013.

Taking advantage of the long, sustained plunge in Apple's share price that effectively wiped out all the appreciation that had occured in 2012, the company indirectly used its credit-polishing cash pile to buy back another $16 billion worth of stock during the second calendar quarter, at an average price of $444 per share.

That's 27 times what the company's stock cost a just decade ago when it bought back shares at around $16.50. However, unlike Microsoft, Apple didn't have an extra $16 billion to spend back then.

If Apple's stock were to, say, recover to levels comparable to Google's (both companies were effectively tied last year, but Apple has been punished with a 25 percent drop in share price as it reported net earnings of $30.25 billion and paid out $10 billion in dividends, while Google's stock has appreciated by nearly 38 percent after reporting total net earnings of $9.46 billion and paying no dividends over the same three quarters), that would result in a doubling of the value of Apple's $18 billion self-investment over just the last two quarters.

Note that AppleInsider does not provide any recommendations or advice related to stock transactions in the extremely volatile and often irrationally unpredictable market.

AAPL stock
Source: Google Finance


Additionally, Apple didn't buy back those shares with its cash. It floated a bond, borrowing against its credit to fund the buyback at interest rates very close to zero. Just after it sold those bonds, the debt market sank. This suggests that Apple may have a time machine at the disposal of its Executive Committee.

Not only was Apple's $1.1 billion ARM windfall from the 1990s dwarfed by the performance of the $6 billion payoff of its stock buyback in the 2000s, but both will very likely be greatly overshadowed by what appears to be a rather easy route to an $18 billion return on its current stock buyback programs of the 2010s.

Apple's successful stock buybacks leveraged the company's artificially low valuation by the market. There was no real change in the company's fundamentals, in the outside competitive landscape or in Apple's ability to deliver innovative products.

However, Apple's $18 billion in stock buybacks and over $10 billion in dividends in the year and a half since they were first announced haven't been able to boost the company's stock price (below), despite being accompanied by industry leading profits and expanding sales.

AAPL stock since 2012 buyback announced
Source: Google Finance


So while it appears to be a safe bet that Apple's remaining $40 billion budget for buybacks could be well spent eating up shares that remain nearly 30 percent below their peak from one year ago, there's no compelling evidence that Apple desperately needs to dramatically expand its buyback program, and particularly not if the goal is to raise the stock price, because so far they haven't been doing that very effectively.

Microsoft invests in MSFT

Stock buybacks' failure to lift a stock's price isn't limited to observable data on Apple, because the company wasn't the only one buying back its shares over the last decade.

In July 2004 Microsoft announced plans to buy back up to $30 billion of its shares using cash. Over the next year, it spent $8 billion buying 312 million shares at about $25.64 per share. In fiscal 2006 it more than doubled its share buying speed, spending $20 billion on 753 million shares, at around $25.50 per share.


Source: Microsoft Annual Report


Despite two years of nearly $30 billion in share buybacks, MSFT shares actually dropped 18.45 percent, a bit worse than Apple's did over the past year of spending $18 billion on buybacks.

MSFT stock
Source: Google Finance

Microsoft invests more in MSFT

In the first quarter of its fiscal 2007 (which started in July 2006), Microsoft announced plans to buy back $20 billion more (and then raised the authorized figure to $36 billion in new buybacks), while also floating a tender offer for up to $20 billion in stock.

Throughout fiscal 2007, the company bought 971 million shares at an average of $27.90 each, spending $27.1 billion.
The next year it bought 402 million shares at an average of $30.90 each, spending $12.4 billion. In fiscal 2009 it bought 318 million more shares at an average of $30.90 each, spending $8.2 billion.


Source: Microsoft Annual Report


In total, after five years of at least $77.7 billion in share buybacks, MSFT shares had actually dropped 18.27 percent.

MSFT stock
Source: Google Finance

Microsoft invests even more in MSFT

In September 2008, Microsoft announced plans to allocate another $40 billion for a third wave of buybacks in the decade, through September 2013.

In fiscal 2010, the company bought 380 million shares at an average price of $26.86, spending $10.8 billion. The next year it bought 447 million shares at an average of $25.63 each, spending $11.5 billion. In fiscal 2012 it bought 142 million shares at an average of $28.17 each, spending $4 billion. That's a three year total of about $26.3 billion.


Source: Microsoft Annual Report


In total, after eight years and significantly more than $100 billion in share buybacks, MSFT shares went up 7.46 percent. Microsoft's shares should have appreciated more than that without buybacks.

MSFT stock
Source: Google Finance


Microsoft's performance over that period of $100 billion in buybacks is noticeably lower than the NASDAQ composite and absolutely crushed by an innovating company like Apple, which over that period of time invested just $216 million in buying back its stock, less than 2 percent of the cash Microsoft had shoveled into its own shares.

MSFT stock
Source: Google Finance


This indicates that buybacks themselves don't necessarily have a significant, positive impact on share price, even when huge dollar amounts are involved over a long term. They principally appear to have value when there's an opportunity to take advantage of irrationally low stock prices.
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Comments

  • Reply 1 of 28
    Personally, I don't think that paying dividends was a good idea. Buyback ok, but dividends... The Wall Street's guys seem to be particularly greedy about them, and we all know they are, (almost) all, bad guys.
    And it's not only that the stock price is lower than it was in September 2012, also the "perception" of Apple is changed. For the worse. And, it seems to me, that some pundits "justify" the low stock price since, according to them, Apple is less innovative than it was in the past. I disagree, but this perception is quite strong.
  • Reply 2 of 28


    I think Microsofts choice to sell AAPL was more political than with regard to investment. I think they did the right thing both for them self and for Apple.

  • Reply 3 of 28
    customtbcustomtb Posts: 346member
    I'll say it.... What is APPL? Did you leave of the E or were you referring to the stock symbol AAPL?
  • Reply 4 of 28


    "When you take risks, it's like jumping in the air. When they don't work out, it's nice to know the ground is always there" - said Steve Jobs over and over again.


     


    Honestly, why does every new AI article have repeating sentences?  This is a consistent problem that needs to be addressed.

  • Reply 5 of 28
    ifij775ifij775 Posts: 470member
    customtb wrote: »
    I'll say it.... What is APPL? Did you leave of the E or were you referring to the stock symbol AAPL?

    APPELL PETE CORP (APPL) - going cheap in OTC for $0.00
  • Reply 6 of 28


    Sorry for my unclear writing. Change "AAPL" to "apple stocks". 

  • Reply 7 of 28

    Quote:

    Originally Posted by dn1234 View Post


    Sorry for my unclear writing. Change "AAPL" to "apple stocks". 



     


    It's not you.  He was referring to the article, which repeatedly refers to buying back stock in APPL.

  • Reply 8 of 28
    MacProMacPro Posts: 19,718member
    "This indicates that buybacks themselves don't necessarily have a significant, positive impact on share price, even when huge dollar amounts are involved over a long term. They principally appear to have value when there's an opportunity to take advantage of irrationally low stock prices."

    This is something I am sure Tim is fully aware of and why I don't worry about recent events and fears outside pressures might influence his decisions.
  • Reply 9 of 28
    Dan_DilgerDan_Dilger Posts: 1,583member
    brutus009 wrote: »
    <span style="color:rgb(24,24,24);font-family:arial, helvetica, sans-serif;line-height:18.1875px;">"When you take risks, it's like jumping in the air. When they don't work out, it's nice to know the ground is always there" - said Steve Jobs over and over again.</span>


    <span style="color:rgb(24,24,24);font-family:arial, helvetica, sans-serif;line-height:18.1875px;">Honestly, why does every new AI article have repeating sentences?  This is a consistent problem that needs to be addressed.</span>

    The Huddler forum software does not render call out text correctly. So it appears to repeat.
  • Reply 10 of 28
    mhiklmhikl Posts: 471member
    dn1234 wrote: »
    I think Microsofts choice to sell AAPL was more political than with regard to investment. I think they did the right thing both for them self and for Apple.
    Agree. Not so good for the cash pile but the wolf does not feed the chickens so has no business in the hen house. I'm personally pleased that MS is tending to its own and Apple the same. Apple is not indebted to MS for anything. MS looks up at the fortress that is become modern Apple and can only envy.
  • Reply 11 of 28
    rob53rob53 Posts: 3,241member

    Quote:

    Originally Posted by brutus009 View Post


    "When you take risks, it's like jumping in the air. When they don't work out, it's nice to know the ground is always there" - said Steve Jobs over and over again.


     


    Honestly, why does every new AI article have repeating sentences?  This is a consistent problem that needs to be addressed.



    These are highlight sentences and are common in all news reporting. It isn't just AI. Was there anything of value you wanted to comment on?

  • Reply 12 of 28
    rob53rob53 Posts: 3,241member


    I have a question for someone who actually knows the answer. When Apple bought back the stock shares, did they retire them or do they still own them? If it's the latter, how many shares does Apple own and who actually is Apple? With Icahn buying $1.5B in AAPL, that would put him around 3M shares. A previous article showed AAPL having around 900M+ shares so Icahn would have around 0.3% share in AAPL/Apple. Does this sound correct? This shouldn't be enough to do something stupid like a hostile takeover would it? Aren't there Apple employees with more than 3M shares of AAPL?


     


    I talked to my financial planner and he said none of the money Icahn "invested" in AAPL actually goes to Apple, it stays in the stock share pool that's bought and sold by other gamblers. None of it actually can be used by Apple other than for (maybe) a credit application. 

  • Reply 13 of 28
    What's the number of Microsoft's stock With all those stocks bought back?
  • Reply 14 of 28
    mhiklmhikl Posts: 471member
    brutus009 wrote: »
    <span style="color:rgb(24,24,24);font-family:arial, helvetica, sans-serif;line-height:18.1875px;">"When you take risks, it's like jumping in the air. When they don't work out, it's nice to know the ground is always there" - said Steve Jobs over and over again.</span>


    <span style="color:rgb(24,24,24);font-family:arial, helvetica, sans-serif;line-height:18.1875px;">Honestly, why does every new AI article have repeating sentences?  This is a consistent problem that needs to be addressed.</span>
    I believe they are usually in quotes the second time round, often adding further detail. Other sites put them in bold colour as eye catchers. This might not be possible here, as AI uses a different client from others.

    Addendum: didn't see rob same comment as I was distracted whilst setting post at same time the other was being written.
  • Reply 15 of 28

    Quote:

    Originally Posted by rob53 View Post


    I have a question for someone who actually knows the answer. When Apple bought back the stock shares, did they retire them or do they still own them? If it's the latter, how many shares does Apple own and who actually is Apple? With Icahn buying $1.5B in AAPL, that would put him around 3M shares. A previous article showed AAPL having around 900M+ shares so Icahn would have around 0.3% share in AAPL/Apple. Does this sound correct? This shouldn't be enough to do something stupid like a hostile takeover would it? Aren't there Apple employees with more than 3M shares of AAPL?


     


    I talked to my financial planner and he said none of the money Icahn "invested" in AAPL actually goes to Apple, it stays in the stock share pool that's bought and sold by other gamblers. None of it actually can be used by Apple other than for (maybe) a credit application. 



    1) They are likely retired, unless they are kept as 'treasury stock' for subsequent reissue later (say, against employee option exercises). Regardless, in terms of the current share count, it will be treated as 'retired' or 'destroyed'.


     


    2) Apple does not own any of its own shares, since a company cannot own itself. The owners are public shareholders and employees (institutions ~60%, others ~40%).


     


    3) 0.3% isn't even close to anyone in their right mind contemplating a hostile takeover. That would, indeed, be a 'stupid' move. Moreover, at ~$450B in market cap, Apple is very unlikely to be a takeover target for anyone.


     


    4) Apple employees (incl. the Board) collectively own much more than 3M shares of AAPL. Add to that the ownership by Jobs' family.


     


    5) Yes, none of money Icahn invested goes to Apple. It goes to the person(s) from whom Icahn bought his stocks. The only benefit that Apple has is indirect, in the sense that increased demand for the stock makes its shares more valuable (and its shareholders wealthier), and helps make Apple more creditworthy in the market for bonds (up to a point, of course).

  • Reply 16 of 28
    mhiklmhikl Posts: 471member
    Finance, terms and their laws stymie me. Can someone answer this.

    Is stock buy back different from buying through the open market? Are companies not allowed to buy back shares of their own company on the open market. I suspect this is the case, or the numbers Apple would be buying back could influence the market and be considered manipulation?
    Cheers, mhikl.
  • Reply 17 of 28

    Quote:

    Originally Posted by mhikl View Post



    Finance, terms and their laws stymie me. Can someone answer this.



    Is stock buy back different from buying through the open market? Are companies not allowed to buy back shares of their own company on the open market. I suspect this is the case, or the numbers Apple would be buying back could influence the market and be considered manipulation?

    Cheers, mhikl.


    1) Companies generally buy back their shares in the open market. Sometimes they also do a 'targeted' repurchase (e.g., if they were to go to Icahn and buy his holdings).


     


    2) Generally, companies in most countries of the world are allowed to buy back their shares.


     


    3) It is not considered manipulation. It is perfectly reasonable for a company to send a credible signal to the market that it thinks its shares are seriously undervalued.

  • Reply 18 of 28
    plovellplovell Posts: 824member
    Part of the reason for paying a dividend is that certain funds can only invest in dividend-paying stocks.

    Paying a dividend means that those funds can invest in Apple.
  • Reply 19 of 28
    Apple was doomed back then by Wall Street and it still is now. Apple just happens to have a tiny bit more reserve cash and a slightly higher market cap now then it did back then. The wolves are still lurking around the chicken coop looking for a filling meal. I wish those wolves would go and feast on Amazon or Google, but it never seems to happen that way.
  • Reply 20 of 28
    mhiklmhikl Posts: 471member
    1) Companies generally buy back their shares in the open market. Sometimes they also do a 'targeted' repurchase (e.g., if they were to go to Icahn and buy his holdings).

    2) Generally, companies in most countries of the world are allowed to buy back their shares.

    3) It is not considered manipulation. It is perfectly reasonable for a company to send a credible signal to the market that it thinks its shares are seriously undervalued.
    anantksundaram, every time you write on finance, Clarity must be your Muse. And you make the dismal science interesting, which I thought was impossible. Are you in finance by profession, if I may be so bold to ask?

    So, since Apple buys on the open market, it seems to pay more than the stock market price at the time. Why is this?
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