Over the last few years, stock buybacks have been demonized by journalists and analysts alike. Once considered a simple tool in a company’s utility belt, they’ve been twisted into a representation of corporate greed.
Buybacks have been called unproductive, counterintuitive, and a whole host of other terms used to describe what plenty of folks regard as just a way for executives to line their pockets further.
But in reality, they’re almost always enacted for the good of the company issuing them. More specifically, to protect investors long-term.
Yes, there have been cases where “bad actor” corporations bought back stock unnecessarily, but it rarely happens. The last thing companies want to do is scare off shareholders.
If investors detect any malicious intent from the board, they’ll flee their long positions in droves.
Because when used appropriately, a stock buyback can be extremely beneficial to everyone involved.
And Apple Inc. (NASDAQ: AAPL) just proved it last night when they announced earnings.
Leveraging the company’s massive cash balance, Apple continues to aggressively use buybacks to keep its operation moving forward.
Recently, they bought back shares (several times) when growth stagnated, particularly in response to sagging iPhone sales.
Investors started to sour on AAPL as a result of the poor sales figures, and the American tech giant used that as an opportunity to preserve capital – buying back shares every time bears started to gather.
It protected long-term shareholders without forcing Apple to make huge structural changes. No major sunk costs were suffered, and nobody lost their jobs.
Instead, the company used its huge cash reserves to level out the effects of slowed growth.
And as of the most recent quarter, Apple seems intent on going back to that same “well” again and again.
Because frankly, their strategy keeps working. The company’s net income for this year is on track to be almost exactly equal to what it was in 2015, the last year of consistent growth.
But that’s not much of an issue to investors. With $200 billion in cash and $100 billion in low-cost debt, Apple can just keep buying back shares and raising dividends.
Meaning shareholders will continue to reap long-term rewards. This alone makes AAPL stock a very attractive addition to any portfolio.
After all, if they can keep share prices rising during a lull in growth, just imagine what’s possible once Apple gets back on track.
Think of it this way; net income this year is projected to be “flat” relative to 2015. Four years ago, AAPL was trading at roughly $100.
As of today, share prices are scraping $220.
And even though net income hasn’t changed, the stock’s EPS is up from $9.22 to $11.51 since 2015. That’s a 25% increase without a change in profits.
How did Apple pull this “magic trick” off?
Primarily through smart, well-timed stock buybacks. Their branding is top-notch as well, of course, and it doesn’t hurt to have legions of fiercely loyal customers.
In that regard, Apple appears uniquely positioned to enjoy a larger benefit from stock buybacks than most.
But still, given the circumstances, you can’t ignore the fact that Apple has made the most of its stock. At this point it’s arguably the best “thing” the company offers.
Because let’s be honest; the last few generations of iPhones haven’t necessarily set the world on fire. That doesn’t matter, though, so long as they continue to empty their piggy bank for the benefit of investors.
Who at this point, are without a doubt their most valued “customers”.
