On April 30, 2020, Apple announced financial results for its fiscal 2020 second quarter ended March 28, 2020 and revealed that Apple’s board of directors had declared a cash dividend of $0.82 per share of the company’s common stock (AAPL), an increase of 6 percent. The dividend is payable on May 14, 2020 to shareholders of record as of the close of business on May 11, 2020. The board of directors has also authorized an increase of $50 billion to the existing buyback program.
For the past half decade, Apple greatly enriched its shareholders by shrewdly deploying buybacks. But the approach that was a splendid gambit when its shares were cheap is looking like a rigid, questionable strategy now that they’re far from a bargain…
Over fiscal years starting on Oct. 1, 2014 (Apple’s fiscal year ends Sept. 30) through March 2020, Apple generated $321 billion in free cash flow and channeled $278 billion, or 86%, into repurchases. That policy proved a big success. Apple paid an average price of $160 per share, a 45% discount to its early May level of $291. Over those five-and-a-half years, Apple has shrunk the number of shares outstanding by over 26%, from 5.865 to 4.334 billion. Shareholders who’ve owned Apple since 2014 have seen their stake in its profits grow by more than a quarter thanks to that regular program of buybacks. That’s a case study in what [Berkshire Hathaway’s Warren] Buffett calls the virtue of buybacks.
…Buying in shares, even at high prices, is preferable to “empire building” by overpaying for acquisitions, a pitfall Apple has wisely avoided. Or perhaps the comfort and stability that Apple epitomizes has permanently raised its value, and that safety does merit a premium multiple. In that case, continuing big buybacks makes sense. That scenario’s possible but unlikely. On paper, the best option might be to conserve cash and buy back loads of stock when Apple is obviously cheap or fairly priced. That course might better satisfy the Buffett criteria. But it’s tough to depart from a tradition that’s been so famously successful.
The only clear conclusion is the one dictated by the numbers. For folks thinking of buying Apple at today’s rich prices, consider that those huge buybacks won’t deliver nearly the bang they used to. And if the safe haven halo fades, and Apple reverts to its traditional middling valuation, the return to the old normal would turn what looked like shelter into the cold comfort of stinging losses.
MacDailyNews Take: This is a good analysis of buybacks, and their benefits, but suffers from the usual lack of imagination, believing that Apple is done innovating and nothing new is coming (Apple Glasses, for one example). Apple is not stagnant and, if Apple’s future is half of what we expect it to be, Apple shares today are grossly undervalued.
[Thanks to MacDailyNews Reader “macnificentseven48” for the heads up.]