Apple sales slip, but investors offered bite of $110B stock buyback Apple has announced the biggest stock buyback in US history: a $110 billion plan to slurp shareholders' scrip. The buyback was announced alongside its Q2 fiscal 2024 results that saw the iGiant win $90.8 billion of revenue – down four percent year over year. Net income dipped two percent to $23.636 billion. Earnings per share …
Because the alternatives are far worse. The situation is that they have a large cash pile, and they don’t have enough actual good business ideas to do with it. That sounds great, but it really isn’t, because the reality is managements in this position lose track of business sense and decide to waste it all on ridiculous pet projects. That’s my experience of seeing it happen over and over for decades in multiple companies. More recently Meta with Metaverse, or Apple with Apple Car.
The top priority of any investor is to wrestle the cash pile off management, before it throws it all away. A special dividend is what one actually *wants*, and buybacks are a poor but acceptable proxy for that:
Tax policy makes giving dividends slightly unattractive, plus management usually have a foolish political libertarian streak to refuse to pay tax. They’d rather make $60bn and pay zero tax, than $100bn, 30% tax, taking home $70bn. It’s insane, but unless you can find a CEO who hasn’t been socialised to the same blindspot (and there aren’t any), that’s the mindset you are stuck with. You will simply never get an exceptional dividend of tens of billions of dollars of cash pile back out of the company, even though that’s the whole point of owning shares for them to give you some of the profits, and its what you paid the share price for.
Ergo, share buybacks. It’s the only way to persuade the management to give shareholders their own money, by allowing them to stroke their own ego of rising share price. Otherwise known as the principal/agent problem.
Without share buybacks, or exceptional dividends, you would be surprised how many companies go through the entire lifecycle of startup:growth:household name:dying giant:insolvent over a time period of 40+ years without ever actually paying its shareholders (net) back the cash they invested in buying the shares. Find a company that pays more than say 2% dividend yield - it’s not many. Now, how many of those have been paying those 2% dividends for more than 50 years? Have you found one yet? Not easy. And that’s just to get your initial money back, not to pay for inflation, let alone make a profit. Otherwise, the whole thing is just equivalent to finding a greater fool to sell to before the whole thing dies in thirty years time.
Fortunately, the share buyback provides the Greater Fool, so when it occurs you should always take it as a trigger to sell exactly in proportion, to crystallise your share of the cash value you are owed.
The situation is that they have a large cash pile, and they don’t have enough actual good business ideas to do with it.
In Apple's case, they should invest heavily in alternative manufacturing outside China and closer to home - they are only going to get more and more squeezed in China. China tolerates Apply because (1) Apple provided training, IP knowledge ("Designed in Cupertino" no longer printed on IPhones in China), and investment capital, (2) Apple provides a channel for low duty China-manufactured products to enter the US - even Trump had a special relationship with Cook that allowed Apple to avoid imports that others faced.
Now that Huawei is getting very squeezed by the US, of course the CCP willl support Huwei but whatever means possible - of course Apple is going to pay for that. But if it wasn't for Huawei getting squeezed, Apple would have lost much more market share in the West - it's a no win situation for Apple with respect to it special relationship with China.
The situation is that they have a large cash pile, and they don’t have enough actual good business ideas to do with it.
So investors get this money - is there any reason to suppose the investors know what to do with it? See what hype other investors are piling into, and pile into that as well? As long as the US is willing to periodically inject more debt to fund speculation, that US actually the best bet in term of return.
“ In Apple's case, they should invest heavily in alternative manufacturing outside China and closer to home”
I don’t think you understand the implications of that. Here’s what AlJazeera have to say about Apple dependence on Foxconn, and they are absolutely smack on:
“China has been a key source of the company’s profitability, the former executive said, with the country’s labour market optimised to meet the peaks and troughs of Apple’s seasonal production cycle. China….facilitates Apple’s on-demand access to a vast pool of migrant workers, allowing assembly lines to swell to up to 1 million workers ahead of a new iPhone launch and shrink to a fraction of that during quieter periods.”
Is that really the economy and society you want to re-shore into your home country? Casual labour lining up at the factory gates at dawn, pushing forward to get the overseer to take them that day? Then at the end of the season joining lines of a million other hobos, their worldly goods in a suitcase, climbing onto rust belt trains to travel four thousand miles to see their families? That’s your picture of the future? I think we can do better.
Thumb up for sarcasm that triggered investor shareholder butt-hurt-ism. Just to be clear, I don't think buybacks are the problem - maybe a symptom of larger problem in this case?
You may or may not disagree - capitalism is not the problem - the problem is that over 4 decades of injecting debt into the market to keep it alive has undermined capitalism in the US.
I might argue instead, that the evolving tax structure in most large Western economies has failed to incentivize R&D adequately, in order to use the rewards of capital investment on further production efficiencies or new products. Instead, overly generous IP regulation has led to market capture and monopolies, incentivizing IP pirates in non-Western governmental areas simply stealing IP and undercutting the monopolies. The buybacks aren't caused by the evils of Capitalism per se, rather it is poor legal frameworks to constrain national and international markets in socially beneficial ways.
If they are illegal then releasing more shares onto the market should also be illegal... correct?
A listed company can sell more shares to raise capital and it can buy them back when they have capital in the bank. Part of Capitalism 101 I'm afraid.
Apple has oodles of cash on hand beyond what it needed to run the business and fund R&D, so why not buy a load of stock back?
Personally, I think that Apple should pause the buy-backs given the threats from the EU etc to their current business model.That cash could be needed to fund a change in the way they do business.
The above is not stock advice and I don't own any stock in APPL at the present time although I did in the past.
SD3: If they are illegal then releasing more shares onto the market should also be illegal... correct?
Cow: FIrst of all thats a different question, each question should be addressed on its merits. I didnt ask about your new q.
SD3: A listed company can sell more shares to raise capital and it can buy them back when they have capital in the bank. Part of Capitalism 101 I'm afraid.
cow: guess what , governments rewrite laws all the time..!
In the beginning there were no safety laws about many things.
Buybacks are clearly only done to give money to the executives who paid themselves in shares in the first place. Both actions should be illegal because they encourage bad things to happen , just look at Boeing.
The funny thing is that the comparison between new shares and buybacks is completely out of scope: releasing new shares is done in an extremely structured way with lots of legal oversight, whereas buybacks are done on-the-fly at any day without any legal basis (apart from: that's capitalism)
Apple had just over 26.5 billion shares outstanding on Dec. 31 2012. They had less than 15.8 billion shares on Dec. 31 2023. In a few more years they will have reduced the number of shares by HALF. I bought all my shares before that first date, so my ownership percentage in the company will have doubled without me spending a dime.
Most of those buybacks happened when the stock price was FAR lower than it is now, so me and the rest of Apple stockholders got a much better return on that money than if they had simply held it as cash.
So tell me why I should be against Apple doing buybacks?
Because the only reason buy backs are happening is because Apple executives have given thesmelves crazy amounts of shares in the first place. You would have even more money if they didnt pay themselves those shares and you receivd that money as dividends.
And therefore it should be illegal to base bonuses on reaching a certain share price *without* compensating for the difference in number of shares between start of the contract and bonus awarding time.
Buying back half of all stock is the easiest way to reach that goal. By doing so, it might reduce long term viability of the company. Or it can reduce total stock market value of the company while optically seeming to be a good thing for the company. For a company like Apple it's probably not that problematic, but it might be creating less new opportunities by not investing more in the company itself. For companies like IBM... fill in yourself.
This seems a clear conflict of interest between the CEO's task to do his best effort to increase value for the shareholder and his own interest to artificially inflate share price by spending as much as profit on buy backs as possible in order to get a larger percentage of shares in the company awarded. I see few reason why a "total number of share difference weighted" share price target would not be a more truthful representation of how much the company valuation changed under the CEO's guidance.
Ah so you're telling me that Apple's execs don't deserve their pay? They get paid a lot, but it is a tiny drop in a bucket compared to the increase in the value of the company.
I think you should be concerned about the pay of executives of companies that are declining, they're the ones who definitely aren't earning it. And maybe not concern yourself with the buyback practices OR executive salaries of companies in which you have no ownership stake!
That's not how it works: board members are not allowed to profit directly from such actions, any awards must be vested for a time.
Stock options, and buybacks, have to be agreed to by shareholders. This is usually implicit but, there will be a motion at the next shareholder meeting. It will sail through because investors will happily take the cash.
That's a separate issue and not actually true. Boards agree targets and incentives with executives, the decisions is then ratified by the shareholders and the awards are automatic if the targets are reached, though vesting periods mean that sales can't be sold straight away. This is all perfectly legal but, given the tax treatment, suffers from the principal-agent problem with shareholders just as keen as management to see the share price rise, right up to the point they sell. In addition, monopsody, which is where a relatively few number of investors own most shares in most companies, means they're not quite as keen on competition as might be expected. This affects lobbying, company policy and executives equally.
> How are buybacks even legal, they are hardly in the best interests of investors ?
Why the downvotes? Buybacks are a big financial PoS. With dividends you get the cash, pay some tax (hey, we live in society right, and enjoy roads, healthcare and schools), and move on. Buyback cash just seems to disappear. The stock never goes up by much, if anything.
Downvotes because it's simply to suggest it's any way illegal.
Since the US law changed to charge a lower rate of tax on capital gains (shares) than income (dividends), the incentive for companies has been to juice the share price rather than pay dividends. This was the driving force by ex-banker Bezos' decision at Amazon to keeps margins and thus profits as low as possible and investors loved him for it.
A buyback really is equivalent to a dividend, modulo tax issues. You can see this by using some realistic cash buyback numbers. Suppose company with $1bn value as an operating business, plus $100M cash pile (total value of the company:$1.1bn), 1bn shares (share value $1.10). Buys back using its cash pile; new value of company $1bn (only operating business, no cash pile), split between 900M shares - share value still $1.10
Now from your POV, suppose you owned 100k shares, worth $110k. You opt to accept the buyback offer on 10% of *your* shares. Now you have $10k in cash, and $100k in shares. The whole transaction was equivalent to a dividend of 10%, which was paid out of the company cash pile. Thank you very much, I really like a 10% special dividend. Yes, the “market cap of the business decreases”. But not the market cap of the *operating business*. Where does the money go? It’s just a bunch of shareholders cashing out a fraction of their stored-but-unused bank account at fair value.
But if you *don’t* sell 10% of your shares, you increase your holding of the company by 10%. This may be fine, as long as you feel that the current share price is fair value for the *operating concern*. You effectively made a *buying* decision, at the current price, which you’ve been pushed into by momentum. The risk is, that your portfolio becomes dominated by two or three big *past* winners. When the pendulum swings, as it inevitably will over the next decades, you lose all your winnings. Instead, you should always be diversified as much as *you* need to be, and allocated such that you would be happy if you were buying it all at todays prices from scratch; as long as re-balancing doesn’t make waste too much transaction cost.
Yeh Tim Cook one of histories great humanitarians.
He wants equality for everyone, and yet he doesnt believe in equality to share the profits of apple he would rather take advantage of poor people in China who are worked as slaves because they are poor.
Such an honourable person, kicking all those poor chinese workers because they are unlucky to be down and out of luck.
> Isn't business speak wonderful ?
I'd love the have the time - and ability - to study business speak.
- "we have changed our mind" looks appalling and indecisive.
- "we have pivoted" means the same, but looks dynamic and actually decisive.
The effect of a few different words is amazing.
During Steve's tenure as Apple boss, there where fascinating new developments AND not a single penny paid as dividend for shareholders. You can look it up for yourself : before 2013 (Steve died 2011) Apple didn't EVER pay ANY dividend. Zero, nada, ziltch, semmi. It's really sad to see what that Crook did out of a fabulous company
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