Neil Cybart: The Apple buyback debate is over

Not so long ago, Cybart says, everybody on Above Avalon wanted to know why Apple bought its own shares. Nobody asks anymore.

From “Apple Won the Share Buyback Debate” posted (free) Wednesday:

apple neil cybart buybackSince beginning to repurchase shares in 2013, Apple has spent $380 billion to buy back 10.6 billion shares at an average price of $35.80 per share. It’s tempting to think that Apple’s share buyback has been a success because Apple shares are trading 265% higher than the average price management paid to repurchase shares. However, one cannot judge buyback’s effectiveness or success by merely looking at the current stock price. Apple retires repurchased shares so there aren’t unrealized gains on the balance sheet from previously repurchased shares.

Share repurchases aren’t meant to boost stock prices even though some management teams may strive for such an outcome. Instead, share buyback is a tool for removing excess cash from balance sheets. In the process, a wealth transfer event is possible as ownership is shifted from shareholders willing to sell shares back to the company to those shareholders not selling shares.

Cybart’s chart shows Apple stepping on the gas after the 2017 repatriation tax cut.

My take: Joe Bland, this one’s for you.

20 Comments

  1. Jerry Doyle said:
    “…. There are still some questions worth asking regarding Apple’s share buyback. For example, with Apple shares trading at premium valuation multiples to the market, what is management’s approach to the buyback pace?”

    @Joe Bland: Joe, welcome to read your response above in addition to others who have their respective views (answer) to the above question.

    Also, should Apple slow or stop its buyback program then what does Apple do with its excess cash? Increase its dividends? Commitantly, I still see Apple more as a “growth” stock than a “value” play and that leads me to believe Apple will continue forward with its buyback program because it knows that it’s stock price today is cheap compare to what it will be in several years.

    I sure welcome folk to weigh in on my comments above. Robert Paul Leitao & Bart Yee, this also (I would think) is an area where you gentlemen have insight. Speak up as a spirit of edification for the rest of us relative to my inquiries. Thanks in advance.

    1
    January 14, 2021
    • Bart Yee said:
      @Jerry I agree that Apple will continue buybacks, even at current valuations. It is setting the precise example of why investors should also be buying at or near these levels – Apple (still!) believes itself to be undervalued (significantly) and its growth potential (roadmap out 3-5 years) to be very very good. Apple, despite the massive turmoil 2020 gave us, excelled in its service to people worldwide and Cook, et.al. already know where they are heading for years – hence knowing all metrics – EPS, revenue, profits, cash flow will go up, its shares outstanding will go down, and multiple (with slight expansion) will be supported.

      1
      January 15, 2021
      • Bart Yee said:
        Regarding dividends, I’m ambivalent. People decry AAPL’s “low yield”, forgetting yield is based on % of current stock price. OF COURSE, the yield will drop if the stock price rises, duh!! You get the same dividend payout dollar-wise, but your stock valuation grew 25-45-75%!!!, much better than any damn 10% dividend hike. Sometimes I think income investors are lazy because dividends means they can sit back and just let it roll in and pay taxes on it at ordinary income rates instead of being much happier that their stock increased at much higher rates and they can pay taxes on any sales at current long term capital gains rates which usually are lower than their marginal tax bracket!

        That said, I fully expect Apple to continue raising its dividend by 10-15, maybe 20% this year and years after but this is tax inefficient? A special dividend is unlikely unless it wants to throw the IRS and government a tax bone during the pandemic.

        0
        January 15, 2021
        • Bart Yee said:
          Regarding acquisitions – I think Apple will stay the course – smaller companies with talent and IP. Apple builds instead of trying to integrate huge existing companies. The Titan project is an example. It could buy its way in (Tesla) but that is a bigger more inefficient headache than slowly building (and learning) over time and integrating Apple’s knowhow in parts, vendors, logistics and assembly. As said here, Apple owning the entire process is key. For autos, partnering seems preferred for the metal making and assembly but otherwise Apple owns the IP and tech, and most importantly, the future imagination of what serves users the best.

          0
          January 15, 2021
        • Mark Visnic said:
          Bart,
          As long as AAPL is undervalued, because of the double taxation inefficiency, I’d prefer all of the capital allocation be devoted to share purchases, save a very small amount to allow demand from institutions that have a mandate to only buy stocks with a dividend.

          1
          January 15, 2021
    • Mark Visnic said:
      ” …. with Apple shares trading at premium valuation multiples to the market, what is management’s approach to the buyback pace?”

      Jerry,
      Apple should trade at premium valuation multiples to the market. It’s cash flow growth is greater and it’s earnings are more predictable and reliable than the market’s. As noted by another of our PED 3.0 colleagues above, Tim and Luca, to name two, believe AAPL remains undervalued. As long as there is strong free cash flow to support R&D and investment for continuing growth, buybacks should continue at a pace equivalent to the growth of free cash flow. And, as long as that is true and the cost of capital is lower than ROI, they should continue to add to free cash flow by returning to the debt market.

      At some hypothetical point, AAPL’s multiple could get to a level where the share purchases are too expensive to be justified. At that point, if growth prospects through investment also are uninspiring, then the dividend increases should increase at a higher rate.

      I think the hypothetical scenario is distant. I’m not worrying about it. In the meantime. I’m long AAPL and aim to get more long in opportunistic bouts of pricing inefficiencies.

      1
      January 15, 2021
  2. Fred Stein said:
    Good questions, Jerry, especially whether they continue the current pace of about $18B quarterly, the current pace.

    I think yes. Now, will they continue to borrow? Hope so. Whether for buybacks or big investments, Apple can easily borrow at rates below what they earn. So buybacks still make sense.

    If Apple gets into autonomous EVs, they can capitalize fleets they lease, rent, or provide on-demand, as a service. That consumes $10’s of B’s. Apple could borrow and then loan money to a car mfg partner.

    2
    January 14, 2021
  3. Fred Stein said:
    The only reason to slow down buybacks, would be if Tim and Luca wish to moderate the pace of AAPL’s rise. Odd thought, but why? Buybacks are part of Apple’s employee compensation, a must-have in tech – not just Silicon Valley. For that purpose, the long-term rise in AAPL’s price is more important than the short term rise.

    Conversely, they want dry powder to protect against stock price reversals. Black swan events may happen regardless of Apple’s internal success.

    1
    January 14, 2021
  4. David Baraff said:
    If they want to stay cash neutral (after that is achieved), they need to keep getting rid of excess cash. The choices are: continue buy backs, increase dividends (a lot) or buy other companies.

    There’s every reason to believe the latter won’t happen (I mean in a big enough way to soak up the cash), and no reason to think huge dividend increases are also likely.

    So other than continuing buybacks, even with the stock at what feels like high prices to me, what other choice is there?

    3
    January 14, 2021
    • Jerry Doyle said:
      @David Baraff: Good comments. “…. So, other than continuing buybacks, even with the stock at what feels like high prices to me, what other choice is there?”

      What seems high prices today can seem a bargain a few years later.

      1
      January 14, 2021
  5. Rodney Avilla said:
    As long as aapl grows at a rate 10% or higher, I say put most of the profits into buybacks. Once that rate stays below 10%, then it should position itself as a value stock, paying out most profits in dividends. I believe we still have a few years before making that transition. 5-10 yrs?

    2
    January 14, 2021

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