Why Apple is buying back stock faster than promised

Why Apple is buying back stock faster than promised

Tim Cook revealed today in an interview with the Wall Street Journal that Apple had purchased $14 billion of its own stock in the last two weeks. This brings the total buyback to over $40 billion. You might recall that back in April of 2013 Apple announced its plan to return $100 billion to shareholders by the end of 2015 including a $60 billion stock buyback. So here we are in early 2014, only 10 months later, and Apple has completed two thirds of its buyback. This is not the sign of a company lacking confidence in its future. Why?

If you read the interview with Cook, he clearly said they wanted to be opportunistic given the stock's decline since the last earnings release. Recall that Wall Street was quite surprised by the so-called "weak" quarter where Apple "only" sold 51 million iPhones, which was a new record, and oh ... they also posted record revenue, and earnings.

Activist shareholder Carl Icahn has been putting pressure on Cook and the board to buy back even more stock than they have been buying, which would mean taking on even more debt. Cook has resisted so far, which I think is smart. I don't want to see Apple burden itself with debt just because theory shows it to be a smarter capital structure. In the real world Apple very well may want to use its cash for a big deal at some point. Cook told the WSJ, "We have no problem spending ten figures for the right company, for the right fit that's in the best interest of Apple in the long-term. None. Zero." Of course ten figures is single digit billions, which would hardly put a dent in Apple's cash pile. I wonder if they'd spend eleven figures for the right deal?

Either way, Apple is clearly more confident in its future than Wall Street. As a shareholder I'm thrilled to see them do $14 billion of stock buybacks following the latest quarterly earnings.

How about you? Would you like to see Apple slow down again, or speed up even more?

Source: WSJ

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Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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Reader comments

Why Apple is buying back stock faster than promised


Because, when Apple release iPhone 6 with bigger screen and so much cool stuff + iWatch their Stock will hit the sky.. If I had 1 million right now I would do the same.. :-))

Man, you are going to suffer a serious letdown when this doesn’t happen. Why is it now a known fact that the iPhone 6 will have a bigger screen? Did Apple say so? Nope. Only Apple critics have said so, and only in the context of predicting Apple’s doom if they don’t. That’s who.

Why obsess about Apple’s stock price? As reported, they had a record quarter with record sales and profits. They still make the best PCs and mobile devices on the planet. Isn’t that good enough for us fans?

Clearly you either don't understand how the stock market works or are more interested in your own daydreams than reality. Possibly a bit of both?

A buyback is similar to a dividend payment in terms of returning cash to shareholders. A buyback is indirect because it decreases the share count, and boosts EPS as you suggested. This usually means the stock goes up, and then if people want the cash they can sell some of their shares to get this cash. A dividend is a direct way of returning cash to shareholders.

I prefer a buyback because it's like having a dividend that is automatically re-invested for you.

What I worry is that Icahn is getting to Cook. While I understand the theory behind what Icahn does, I despise his methods. I mean, I would love it if every company I bought significant stock in would spend vast amounts of money to buy back stock and inflate the stock value. Then I could just dump the stock at the higher rate and make a huge profit for nothing.

Do I think Apple should take advantage of the low stock price and buy back a certain amount? Of course. Do I think it should buy more than was stated, potentially because of outside pressures? No, make that hell no!

The buyback was a smart move. The key is not dollar value but number of shares. Wall Street gave them a discount to buy back more shares than they would ordinarily would in a buy back. That should marginally help their per share metrics while also giving investors the confidence that there is only so far that the Street can take the stock down before intervention takes place. In other words, there is little downside to getting into Apple at current levels. I hope that the street keeps this game up because at some point the company will be private, can ignore the investment community and still mint money that they don't have to share with people looking to play arbitrage games with the company's stock.

Apple isn't stupid. Buy low, sell high when the stock sores after iPhone 6 Phablet, iWatch, 12-13" iPad, new Apple TV with huge gaming capability and Apple TV App Store and what else??? :)

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Only difference here is Apple won't sell new shares when the new products hit. They have absolutely no need to raise equity here. Ever. I hope.

As a shareholder I want Apple to do whatever Ape wants to do. I trust the guys who know all the numbers and the secret devices to be released know more than me. There are two things any stockholder is supposed to do. Only use money that you don't need. Stocks is a long play and if you get nervous in the short term then you should have put the money into a GIC or something. The second is not to get emotional and some people look at Apple based on many factors other than the numbers. I bought shares at $35 so I have a lot of upside. I'm not worried about Apple or my shares.

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Honestly, this speaks more to the investors not investing than it does to Apple buying back.

Why aren't other investors investing?

If, based upon "confidence," Apple is buying back shares, then could there be grounds for insider trading? Who's confident, and why, isn't exactly important--it's who they're explaining their confidence to that we need to investigate to find out just "why" they're buying back so quickly.

I do not think they're basing this on confidence of the iPhone 6 or the iWatch.

Chris - just curious as to your stand 10 years ago on Apple?
Even with all the innovations they already had and the iPod selling briskly, but before the phenomenal iPhone was even close to release, what was your take?

Most in the investment sector, analysts, financial advisor, scoffed and laughed at Apple.

I remember TELLING my broker I wanted Apple stock. He laughed at me. He later regretted that on two levels. When I sold, and made a killing, and when I dumped him. Actually he made some money off me so I don't think I really made him too upset...

I can explain it for you.

Apple does a lot of overseas business. The majority of its cash is held overseas for tax purposes. Bringing this cash back into the United States would cause its previous income from other countries to be taxed by the United States. This would result in a very large tax expense. With interest rates so low, it is actually cheaper and in Apples best interest to fund this with debt (even though they have the cash) because it is cheaper than paying the excess taxes.

For every pundit who puts a positive spin on something there is an equal and opposite pundit who spins the negative. I have also read opinions by financial pundits describing this accelerated buyback as a desperation move by Apple trying to stop the price from losing its $500 bottom. So which is it? A smart move or a desperate move?

Let me see if I get this straight.

Apple posts yet another record quarter with strong profits and increasing number of products sold, and its share price drops.

Google sold Motorola off at a loss, and clearly overpaid for Nest, and its share price increases.

Amazon is spending more than it earns, with no clear profit stream in sight, and this is supposedly good for the company and the investor?

Yahoo is actually earning less in ad revenue, and going all out on an acquisition spree, and investors seem to love it.

I will never understand how these morons at wall street work and think.

It's called "gambling" and has little to do with anything real. Someday our grandchildren will list around and have a big laugh over "Capitalism" and how anyone could have ever bought into such utter nonsense, but you will be thrown in the loony bin if you point out the idiocy of it today.