Warren Buffett educated Tim Cook, Steve Jobs about the benefits of stock buybacks
Apple CEO Tim Cook shared details about Apple's start of stock buybacks, and has confirmed that Warren Buffett put Apple on the track to do so -- and the "Oracle of Omaha" tried to put the company on the path years before.
Warren Buffett
Speaking to CNBC at the Berkshire Hathaway shareholder's meeting in a broadcast interview, Cook elaborated on the time leading up to Apple's decision to start the stock buybacks, and how we ultimately made the decision to do so at the end of 2012.
"I'd been in the CEO spot maybe a year or so, we had a growing amount of cash, we had crossed the $100 billion mark, if my memory is correct. When I don't have experience with something, I make a list of the people that I think that are the smartest people that I can contact to get advice," recounted Cook. "Warren was on the top of the list. As you can imagine, I hadn't met Warren before."
"I get his number, I call out in Omaha, and I wasn't sure that he'd take the call. Call out of the blue, he doesn't know me from Adam," said Cook. "But he took the call, and I had a great conversation with him, and that was the first time that I met Warren."
"He was very clear to me, he said 'let me just cut through it, if you believe that your stock is undervalued, you should buy your stock,'" Cook said, recounting the call. "I thought that was just the simplest way to look at it."
Cook and Buffett also both confirmed during the Berkshire Hathaway shareholders' meetings and resultant interviews that Steve Jobs was also given the same advice about buying back stock. Cook took the advice, and Jobs continued to reject it for years.
The Wall Street Journal called the repurchase programs a "bad investment" in late 2018. That didn't stop Apple from announcing more, with an additional $75 billion program announced during the April 30 earnings announcement.
Other Apple-related tidbits that have come out of the shareholder's meeting include the fact that Apple buys a small company every few weeks, and Apple is now more of a "consumer company" than a tech firm, as it has evolved.
Warren Buffett
Speaking to CNBC at the Berkshire Hathaway shareholder's meeting in a broadcast interview, Cook elaborated on the time leading up to Apple's decision to start the stock buybacks, and how we ultimately made the decision to do so at the end of 2012.
"I'd been in the CEO spot maybe a year or so, we had a growing amount of cash, we had crossed the $100 billion mark, if my memory is correct. When I don't have experience with something, I make a list of the people that I think that are the smartest people that I can contact to get advice," recounted Cook. "Warren was on the top of the list. As you can imagine, I hadn't met Warren before."
"I get his number, I call out in Omaha, and I wasn't sure that he'd take the call. Call out of the blue, he doesn't know me from Adam," said Cook. "But he took the call, and I had a great conversation with him, and that was the first time that I met Warren."
"He was very clear to me, he said 'let me just cut through it, if you believe that your stock is undervalued, you should buy your stock,'" Cook said, recounting the call. "I thought that was just the simplest way to look at it."
Cook and Buffett also both confirmed during the Berkshire Hathaway shareholders' meetings and resultant interviews that Steve Jobs was also given the same advice about buying back stock. Cook took the advice, and Jobs continued to reject it for years.
The Wall Street Journal called the repurchase programs a "bad investment" in late 2018. That didn't stop Apple from announcing more, with an additional $75 billion program announced during the April 30 earnings announcement.
Other Apple-related tidbits that have come out of the shareholder's meeting include the fact that Apple buys a small company every few weeks, and Apple is now more of a "consumer company" than a tech firm, as it has evolved.
Comments
This is just public Buffett appeasement <=> countryclub gameplay that a product guy wouldn’t be involved in. Hence my ref to Steve
With that said, I was never a big fan of Financial Engineering or the value of company. However, when you look at Apple past and how they make product and attack a market, they would never be seen as Amazon or Facebook with the stock trading 50x to 100x their earnings. There was no way to put that much cash to work trying to grow their business any faster than it was already growing, if they bought things which were too big it would have just dragged the company down. From an acquisition stand point Apple had the highest success rate on ROI. must times company buy another company and never recover their investment and shareholder suffer for it.
Now we know why Buffet's bought in, Apple generate more cash than any company and if they keep that up Buffet and I will be that last people holding Apple's stock and is trading at $1000/share. Plus Buffet's is collecting $766M/yr in dividends.
As it is I believe your $1000 prediction will be way off in 7-10 years. On the low side of course. And some of that will be thanks to the buyback.
Let’s re-phrase that to add just a tiny bit of insight most somehow miss.
Apple takes a bit of the cash, which belongs to us shareholders, and instead of giving it directly to us and thereby forcing a tax liability for each of us, it uses that cash on our behalf to purchase for each of us a larger ‘share of the company.’ Did you read that?
You see, people get hung up on the notion of their personal share count. I think many people would consider it a good move on their part if they re-invested their dividends and later saw the share price rise. They see a higher number of shares in their account and a higher share price and that affirms their choice to buy more stock with the cash Apple paid out to them.
Of course, share buybacks have exactly this same affect, just without the intermediate step of having the government step in and claim 15-20% off the top after the cash is paid out but before it can be used to buy more shares.
The other difference is that rather than increase the number of shares the shareholder owns while the total outstanding share count remains unchanged, in this case the shareholder’s number of owned shares remains the same while the total number of outstanding shares (the denominator) decreases. Folks aren’t good at math, so let me just tell you, the effect is the same as soon as you stop thinking in absolute number of shares and start thinking in terms of your personal ownership percentage of a business and its future profits.
As a long term investor, and this is who share buybacks are designed to benefit, you want your percentage ownership of the business and its future profits to increase. That’s what you want. You shouldn’t care whether that’s by your own personal dividend re-investment actions or by management’s actions to buy back shares. Except there are potentially two advantages to having the company act to increase your percentage ownership over your own ability to do so.
First, as mentioned above, the tax issue. You’ll avoid the immediate tax hit, leaving more money to increase your ownership percentage, and over time that extra juice can have a compounding affect in your favor. As Buffet has stated, every dollar a young man saves and invests can return $20 over the course of his life. Same principal here on deferring taxes.
Second, company management knows better than you or I the future prospects of the business (which informs whether to retire shares) and also the likelihood the business is undervalued at any given time (which informs when to retire shares).
So share repurchases do exactly what educated and insightful long-term investors would want; to increase their percentage ownership in what they deem a great business at attractive prices while deferring tax liability.
Go back and read that a second time.
Having heard these discussions here for years my view is that those who argue against retiring shares are simply uninformed or unable to see the practice for what it is; a tax favorable and well-timed investment by a business on behalf of its long-term owners.
Share repurchases also benefit potential shareholders - those considering making an investment in a business. By removing unproductive cash from the balance sheet and using it to reduce the share count, a business increases the percentage of each dollar invested representing the operating business. And at the same time increases the ownership percentage represented by each remaining outstanding share. As a potential investor you want your invested dollars [capital] to purchase an operating business that produces outsized returns, not static and unproductive cash.
There was a time a few years ago, back when Icahn was carping, that each dollar invested in Apple shares represented only 75 cents invested in the operating business and 25 cents invested to buy a bit of Apple’s cash hoard. Most casual investors don’t think about that. But what if you said to your broker, “please invest $100,000 from my account in this company I feel is a good business” and your broker replied, “sure, but I’m going to invest only $75,000 in the company’s shares and let the other $25,000 sit and do nothing for you.” You’d question his action, and yet that’s exactly the decision that all of us investors faced, and made, when we bought Apple shares back in those days. Get unproductive cash off the balance sheet, and put it to good use.
Can you hear me now?!!!
And why does anyone think that “financial engineering”, or whatever suboptimal name you want to give it, comes at the destruction of continued profitability or market growth? Did you even bother to look at the balance sheet? Apple has cash and is not running out of cash... PLUS what would you use the cash for INSTEAD of buying back shares? Let me guess, buy Tesla and Netflix and Disney.
I’m not disrespecting your opinion, but are you listening to yourselves?
If a company is fundamentally healthy, buybacks make sense. Apple can’t help that Wall Street has this schism in how they value a dollar from services compared to products. Those of us that follow Apple know the stickyness of the ecosystem and the loyalty of the fan base makes it more like a service but the analysts don’t see this.
Which is good for me personally and has allowed me to make much money off my long term Apple stock holdings.