Dow Jones MarketWatch, May 4, 2024, article: "Here’s what is so amazing about Apple’s stock buybacks." [Responsible use of profits that exceed need for capital to continue successful production of goods]

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Source: Dow Jones MarketWatch, May 4, 2024, article

 

Deep Dive

Here’s what is so amazing about Apple’s stock buybacks.

Last Updated: May 4, 2024 at 6:29 a.m. ET
First Published: May 3, 2024 at 12:23 p.m. ET

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By Philip van Doorn

 

 

Apple reported declining sales but made a big move to soothe investors.

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Late on Thursday, Apple Inc. AAPL announced its quarterly results, which included a 4% decline in sales from the year-earlier quarter to $90.75 billion and a 2% decline in net income to $23.64 billion. The company also reported a 10% decline in iPhone sales to $46 billion.

So why were Apple’s shares up 7% in midday trading on Friday? Therese Poletti pointed to a restoration of confidence for investors because the company’s board had authorized an additional $110 billion in stock buybacks.

It turns out that Apple’s buybacks have had quite a positive effect on its earnings per share. When a company repurchases stock, the share count is lowered, which boosts EPS. But if the company has been shoveling new shares to its executives at the same time, the buybacks might only serve to mitigate the dilution to nonexecutive investors,

In the case of Apple, the net share count keeps going down. Even though the company’s net income was down 2% from a year earlier for the most recent quarter, earnings per share actually increased a penny to $1.53, because the average share count used to calculate EPS had declined 2%.

Those may not seem to be astounding figures, but consider this: Over the past 10 years, Apple’s share count has declined by 37%, according to FactSet.

How much of a difference can that make? Consider this simple example:

  • A company’s profit is $1,000.

  • There are 100 shares.

  • That makes for $10 in earnings per share.

What if the share count had been reduced by 10%?

  • The company’s profit would still be $1,000.

  • There would be 90 shares.

  • EPS would be $11.11.

  • EPS would have increased 11%.

Using similar math, a 37% decline in the share count would lead to a 59% increase in EPS, if all other things were equal. And for the greater part of the last 10 years, Apple’s profits have been increasing.

Apple’s buybacks have been an effective use of the company’s excess cash, even with the recent declines in revenue.

This is why Apple scored so high among the S&P 500 SPX in this look at 20 years of returns on invested capital.

 

About the Author

Philip van Doorn

Philip van Doorn writes the Deep Dive investing column for MarketWatch.

 

 
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