If profits and revenue are dropping. Isn't that an indication of harder times? Shouldn't they be saving money right now to invest more in their R&D to tide this over and continue growing?
I saw in the news yesterday that someone was looking to buy Paramount for $26B or thereabouts. I hope they at least went through the thought exercise of whether this builds more value than five huge acquisitions that could strengthen their offerings.
Apple has done buybacks for a while though, it is only much larger now. I believe their historical buybacks were around the $25b.
Doing this buyback is an indication that the roic is not great enough and deem it better to give it back to shareholders. Huge acquisitions are neither easy or cheap, cheap in the sense of not only the multiple you are paying but also the costs downstream of having to take over that company.
Acquisitions tend to destroy value, especially "non core" acquisitions. I think they understand that not becoming a chaebol owning half the economy is actually a good idea.
BigCorp buys BigCorp deals seem to be about consolidating the market to 1)reduce competition 2)raise prices 3)kill jobs = a)raise bonuses b)promise a higher stock value. Also synergy.
We'll get a pre-merger announcement about creating new jobs; biz media everywhere will excitedly amplify it.
Typically, the DoJ can't rubber stamp these deals fast enough but sometimes they balk - or at least pretend to.
You tell me what am I missing. They had $17,645,500,000 in unlevered FCF last quarter. With $32,695,000,000 in Cash and CE on their balance sheet.
Edit: I see the gap now with your question. The buyback plan/funds are not executed all at once. A company approves amounts to be used for buybacks and then it happens over time. My point is that these buybacks are pretty normal for apple. You can look at Apples historical buyback plans and I think the last announced one was a year ago for $90b.
How is it ridiculous. Go look at their historical buyback plans.
2018 - $100b
2021 - $90b
2022 - $90b
2023 - $90b
2024 - $110b
Is it a large? Yes. Is it out of the normal for them? No. It is also not especially a difficult reach when looking at their existing cash/security balances and FCF.
>Shouldn't they be saving money right now to invest more in their R&D to tide this over and continue growing?
That is precisely what a stock buyback is. They could invest that cash on the open market, or return it to investors through dividends. Instead this sends it to the common pool to fund current business operations.
Sure, but that's all hypothetical. There is no law stating "higher EPS = higher share price". Stocks can (and do) still go down after a buyback. Whereas dividends are laid out exactly ahead of time and can be predicted.
Whats hypothetical about it? Nothing I said was hypothetical. The company is doing some math to determine that the roic is below their coc or some similar measurement. So they could pay a dividend or buyback shares. Now it is true that the motivations for either could have many reasons. It is also true that after the buyback happens, prices could go back down...it is a market with changing information constantly. So yes a dividend is not a buyback but they are both ways to return capital to shareholders.
From the company's perspective, dividends and stock buy backs are identical.
Say a company has 10 shares @ $10/share, w/ a total value of $100. The company has $10 to return to shareholders because it can't make better use of the money internally.
----Share buyback example------
- company buys back 1 share @ $10
- the company's value is decreases by $10 for having distributed the cash
- company now has 9 shares of stock at $10/share, for a total value of $90
-----Dividend example-----
- company distributes $1 to each shareholder
- the company's value is decreases by $10 for having distributed the cash
- company now has 10 shares of stock at $9/share, for a total value of $90
Buybacks literally hands money to current investors. They can only buy shares from people who own shares Ie investors.
Individual investors get three options they can some shares and maintain the exact same percentage of the company making this equipment to a dividend, they can liquidate more shares which a guaranteed buyer propping up the price, or they can avoid selling shares and simply own more of the company. The final option is more tax efficient because there’s no taxable event unlike a dividend where you pay taxes before buying more stock.
It's not a dividend at all. A dividend gives the share holders money. This (potentially) increases the value of the share holders stocks. But the most important difference here is the Apple can sell these shares again if they need to later and they cannot get back the money they spend of dividends. If Apple feels that the market price of their stock is low and they have nothing better to do with the money then it makes sense to buy these shares.
It's an indication of harder times in the past, not in the future. Management has specific information about what the future holds that we as investors do not
Also Apple doesn't have a cash issue. Companies that need to think about liquidity are those on the verge of bankruptcy, which isn't the case here. There's sufficient cash (from the Balance Sheet but also from Operating Cash every year) to fund R&D at Apple. Heck, if you divide their annual R&D spend ($29B in 2023) by the cash sitting on their balance sheet ($148B in 2023), they have enough cash today[1] to fund 5+ years worth of R&D without selling a single additional iPhone during that time
Buying back stock when the price drops is just taking advantage of the current situation to return capital to investors "cheaply".
---
[1] Technically today = September 30, 2023, when they reported their 2023 10-K, if we're being pedantic. Both cash and R&D figures from that 10-K available here:
Ctrl+F "$148.3 billion as of September 30" for the cash balance and "Research and development" (there are multiple matches) for the $29B in R&D
So is this the official IBM-ification of Apple? They’re going to resort to financial engineering to prop up their stock? I mean I understand. A lot of key staff have shares and options that vest over time and they don’t want to lose this talent to a competitor.
But still. 110B could do a lot more than merely increase the P/E. I guess it’s a bullish signal: it says the company thinks its stock price is lower than it should be. I dunno.
Now they can use this as collateral to take out a big loan, buy some other productive company, use the profits from that to pay the loan and not pay any tax, because it's a loan. Wealth begets wealth.
When you apply for a mortgage they ask you to show all your assets regardless of how liquid they are. Having a high value brokerage account is a huge plus since they can go after it in the event of a foreclosure.
With a mortgage, the house itself is the collateral.
In this case, the profits on the shares "aren't realised until you sell them", so it's not real profits, but somehow you can use them as collateral to get a loan and grow your total wealth - without spending a penny or even having to get a job. In that case, I think if you're using shares as collateral, the profits on those shares should be taxable.
So each time you do a cash-out refinance of your home, that should be taxed as income? You still own your house, you haven’t sold it, so why should you be taxed repeatedly on it?
They have so much cash, and the business is so valuable there isn’t a better place to put it.*
So you give it back to the shareholders, and a buyback is tax advantaged for the shareholders compared to a dividend.
* if you are, say, Pepsi, and you have a very good year, you might want to “bank” some or all of those profits for a lean year or for some future investment. But the CFO doesn’t put $10B in a bank account, they invest it. If they put 10B into Apple it won’t have any legal implications (Apple is so huge) and it’s probably a better return than anything else available.
But when you are Apple the sums are so huge and the choice of places you can invest so limited, that giving it back to the shareholders and letting them decide is pretty much your only option. A good problem to have.
That kind of money ... they could build their own fab?
Other than that, maybe R&D? Even if Apple were known as an R&D company (and they haven't been known for that since Jobs returned and among other things got rid of ATG), probably wouldn't even need that kind of cash to run.
I'm sure they do a lot of R&D. They built their own CPU for goodness sake.
But there's diminishing returns, at some point the ROI for the next candidate investment isn't good enough to make it a valid choice over a buyback or dividend.
They have an architecture license, so can do quite a bit beyond simply "tweaking" it. They have some degree, presumably a significant degree, of "blank sheet" implementation.
At this point, probably the main benefit of the ARM license is just the patents.
I have read that the architectural license comes with access to ARM engineers expertise, internal build tooling, validation and testing systems etc. So whatever processor design Apple may be doing, they are definitely doing it with the guard rails on.
Those few architectural licenses are secret, but surely, as you say, allows Apple to discuss all sorts of things with ARM’s engineers. I have long wondered what constraints it might carry. They have added an instruction or two, but I doubt there is any real reason for them to ever want to make significant instruction set changes.
Apple has a longstanding relationship with ARM back to the latter’s founding. The sale of its large chunk of ownership in ARM helped Apple survive in its late-90s reboot. So it’s quite possible that their license is quite different from those of the few other hardware licensees.
Also, Apple plays the long game. I’m sure they also have a lot of RISC-V experience by now. Not just weirdo in-house research products; I’d be shocked if there weren’t tiny RISC-V cores doing small housekeeping tasks inside some of their huge chips, just for the experience. Maybe even a few inside an Apple pencil or maybe an ipad screen digitizer since the computation isn’t really user visible.
As does ARM: if RISC-V ever becomes airborne (it’s still speeding down the runway) I suspect ARM will haul out a stack of patents and start demanding payment. Apple’s license surely covers them here.
Seriously though, people decrying this as financial engineering seem, to me, to be completely missing the point. It's not the purpose of a firm to endlessly expand their business until they do everything. It's to do the thing they are good at, what they have a comparative advantage over the rest of the industry over, and then instead of chasing ever worse roi on ever more marginal investment and research, return the rest of the money to the investors so they can make their own choices on what to invest on.
Companies have a limited number of R&D projects and not all of them have great expected returns on investment, so sometimes it makes more sense to wait before investing in Project n+1
To be sure. There is a popular sentiment that the Next Big Thing is just within reach, is always within reach, if the big guys like Apple or Meta would just throw enough resources at it it would come to exist.
I think that is fallacious thinking. Apple tried hard with the Newton but larger, infrastructure pieces were not yet in place. Meta has tried hard with VR but there is no evidence that a large population even wants this tech.
Apart from AI, we may simply be in an innovation desert for the consumer tech companies. Things like the portable digital music player, smart phone, might only come every decade or so — and no amount of R&D will force that to behave any differently.
Hmm. 200M phones a year and ~50M computers and some number for million of accessories if the Fab could do the whole gamut and do it at as-good or better than TSMC scale hmmm I doubt it would be a profitable endeavor in the long run
> But when you are Apple the sums are so huge and the choice of places you can invest so limited, that giving it back to the shareholders and letting them decide is pretty much your only option. A good problem to have.
Crazy thought but I know one larger entity to park the money in and it's the US treasury. Apple has no positioning to improve things like infrastructure and public education.
Stock buybacks should be a clear signal that taxes can go up at that bracket of the economy.
> If they put 10B into Apple it won’t have any legal implications (Apple is so huge) and it’s probably a better return than anything else available.
While this is true, investors would generally rather have the money returned to them so they may diversify their portfolios as they see fit instead of letting the company do it for them. (at least for spherical cow investors)
TikTok would be a good purchase for them I'd say. They certainly are not competing. It would be interesting if they also managed to do ads on TikTok in a user privacy focused way.
Every single time they have tried at anything social, it’s been an abject failure. They are not a “services” company outside of upsells from their own customer base.
> I guess it’s a bullish signal: it says the company thinks its stock price is lower than it should be. I dunno.
That's precisely what this is. It's financially prudent for a company with this much cash to buy back their stock when it's (relatively) cheap. It also doubles as signaling to the market. It's cheaper and better than issuing dividends.
In addition to accounting/reporting, the CFO's job is to decide if/where to spend capital and if/how/when to return it to shareholders.
Buying back stock when the price drops is not really financial engineering—it's just finance, period.
If you’re a shareholder, this is great news. If you’re not, I don’t know what to tell you. Think of it more like Berkshire Hathaway. A publicly traded company’s purpose is to generate a return on investment for it’s shareholders.
Apple is also one of the largest companies, so looking at absolute dollars is not really informative. Would have to look at some ratio like as % of operating cash flow or % of market cap, or at a minimum adjust for inflation
Very good question. Looks like they bought $44 billion in 6 months and had about $30 billion left in what was authorized, so raising it a bit "makes sense" if they wanted to continue at that clip (which almost feels like indication that management expects their stock to be somewhat undervalued over the next year)
> During the six months ended March 30, 2024, the Company repurchased 248 million shares of its common stock for $44.0 billion. The Company’s share repurchase program does not obligate the Company to acquire a minimum amount of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
> In addition to its contractual cash requirements, the Company has an authorized share repurchase program, under which the remaining availability was $30.1 billion as of March 30, 2024. On May 2, 2024, the Company announced the Board of Directors had authorized an additional program to repurchase up to $110 billion of the Company’s common stock. The programs do not obligate the Company to acquire a minimum amount of shares.
About ten years ago our company did stock buybacks at the peak stock value in over 5 decades and it’s been all downhill since. Gotta love it when the raiders succeed.
In the grand scheme of things this is simply money that's lost to the stock market... Aside from the short term artificial boosting of the share price to prevent downsides, what other reasons would prompt such a mammoth buyback?
Dividends signal a commitment to future dividends, which is not always preferable. So called special dividends are one-time, but they raise eyebrows
Dividends can also be taxed differently. There's some nuance there beyond my expertise, but generally share buybacks are taxed more favorably (although there have been recent legislative efforts to change that)
What's artificial are the compensation plans that are written in terms of nominal (gameable) share price instead of real market caps and payouts to shareholders.
There nothing more artificial than re-purchasing your own shares to drive up the price.
> Sometimes companies will buy back their stock strategically because they believe it is undervalued - that’s a long term strategy.
Depends on how the buyback is deployed (maybe if done in intervals) but I'll assume the announced buyback by Apple is to be done immediately to offset any drawbacks arising from their recent disappointing earnings call.
Stock buyback != "artificially drive up share price".
Someone else provided a nice little breakdown [1] of how buybacks work in comparison with dividends.
I recommend you read that, and also actually read the article that you posted instead of continuing to argue a point that you are incorrect about.
Apple specifically has continued to return value to shareholders via stock repurchases over a long period of time. There's nothing artificial or abnormal about their stock buybacks, and you can do the research for yourself to compare their stock buyback programs with the company performance over time.
Dividends have nothing to do with stock buyback and you obviously have a comprehension problem since the link I shared explains it in very clear terms. It's right there in the name. The intention of a stock buyback is for the company to buy/own more shares and this effect drives up demand for anyone looking to acquire those company's shares in the open market.
I've already provided you with the necessary information and context to better understand share buybacks. It's up to you to understand that information because I can't do it for you.
There seems to be a lot of discussion about stock buybacks vs. dividends. Note that Apple also announced an increase of their dividend from $0.24/share to $0.25/share[0], so they are both repurchasing stock and paying out more in dividends.
Also, the Inflation Reduction Act introduced a 1% tax on stock buybacks starting in 2023[1], so there is still in some sense a tax impact on the remaining shareholders.
Interesting. But Apple can easily get around that tax by using one of its foreign companies, one of its holding companies, or one of its foreign brokerage accounts to buy back the U.S. stock from overseas. That non-regressive tax is only for weaker medium sized companies that don’t have any international incorporations or companies that want to pay more taxes out of charity.
It’s very sad that the Inflation Reduction Act was nothing more than tax increases when it should’ve been solely cuts to wasteful government spending instead. Instead of cutting spending, they did the opposite and increased spending.
90 comments
[ 2.9 ms ] story [ 142 ms ] threadDoing this buyback is an indication that the roic is not great enough and deem it better to give it back to shareholders. Huge acquisitions are neither easy or cheap, cheap in the sense of not only the multiple you are paying but also the costs downstream of having to take over that company.
Sony and Apollo Capitol 'expressed an interest'.
BigCorp buys BigCorp deals seem to be about consolidating the market to 1)reduce competition 2)raise prices 3)kill jobs = a)raise bonuses b)promise a higher stock value. Also synergy.
We'll get a pre-merger announcement about creating new jobs; biz media everywhere will excitedly amplify it.
Typically, the DoJ can't rubber stamp these deals fast enough but sometimes they balk - or at least pretend to.
Edit: I see the gap now with your question. The buyback plan/funds are not executed all at once. A company approves amounts to be used for buybacks and then it happens over time. My point is that these buybacks are pretty normal for apple. You can look at Apples historical buyback plans and I think the last announced one was a year ago for $90b.
2018 - $100b
2021 - $90b
2022 - $90b
2023 - $90b
2024 - $110b
Is it a large? Yes. Is it out of the normal for them? No. It is also not especially a difficult reach when looking at their existing cash/security balances and FCF.
That is precisely what a stock buyback is. They could invest that cash on the open market, or return it to investors through dividends. Instead this sends it to the common pool to fund current business operations.
This returns money to investors just like dividends do (but it's better tax-wise).
Not really, it only helps to prop up the stock price. It has no effect on actual yield the way dividends do.
- Buybacks are more tax efficient
- Buybacks can be a signal that the company thinks its current market price is undervalued.
- Can increase control to existing shareholders.
Say a company has 10 shares @ $10/share, w/ a total value of $100. The company has $10 to return to shareholders because it can't make better use of the money internally.
----Share buyback example------
- company buys back 1 share @ $10
- the company's value is decreases by $10 for having distributed the cash
- company now has 9 shares of stock at $10/share, for a total value of $90
-----Dividend example-----
- company distributes $1 to each shareholder
- the company's value is decreases by $10 for having distributed the cash
- company now has 10 shares of stock at $9/share, for a total value of $90
Individual investors get three options they can some shares and maintain the exact same percentage of the company making this equipment to a dividend, they can liquidate more shares which a guaranteed buyer propping up the price, or they can avoid selling shares and simply own more of the company. The final option is more tax efficient because there’s no taxable event unlike a dividend where you pay taxes before buying more stock.
It's effectively a dividend with different tax implications
Also Apple doesn't have a cash issue. Companies that need to think about liquidity are those on the verge of bankruptcy, which isn't the case here. There's sufficient cash (from the Balance Sheet but also from Operating Cash every year) to fund R&D at Apple. Heck, if you divide their annual R&D spend ($29B in 2023) by the cash sitting on their balance sheet ($148B in 2023), they have enough cash today[1] to fund 5+ years worth of R&D without selling a single additional iPhone during that time
Buying back stock when the price drops is just taking advantage of the current situation to return capital to investors "cheaply".
---
[1] Technically today = September 30, 2023, when they reported their 2023 10-K, if we're being pedantic. Both cash and R&D figures from that 10-K available here:
Ctrl+F "$148.3 billion as of September 30" for the cash balance and "Research and development" (there are multiple matches) for the $29B in R&D
The common example for this is for non liquid shares that you can’t really sell.
In this case, the profits on the shares "aren't realised until you sell them", so it's not real profits, but somehow you can use them as collateral to get a loan and grow your total wealth - without spending a penny or even having to get a job. In that case, I think if you're using shares as collateral, the profits on those shares should be taxable.
So you give it back to the shareholders, and a buyback is tax advantaged for the shareholders compared to a dividend.
* if you are, say, Pepsi, and you have a very good year, you might want to “bank” some or all of those profits for a lean year or for some future investment. But the CFO doesn’t put $10B in a bank account, they invest it. If they put 10B into Apple it won’t have any legal implications (Apple is so huge) and it’s probably a better return than anything else available.
But when you are Apple the sums are so huge and the choice of places you can invest so limited, that giving it back to the shareholders and letting them decide is pretty much your only option. A good problem to have.
Other than that, maybe R&D? Even if Apple were known as an R&D company (and they haven't been known for that since Jobs returned and among other things got rid of ATG), probably wouldn't even need that kind of cash to run.
But there's diminishing returns, at some point the ROI for the next candidate investment isn't good enough to make it a valid choice over a buyback or dividend.
They licensed a design from ARM, tweaked it, and sent it to TSMC to manufacture it.
At this point, probably the main benefit of the ARM license is just the patents.
Apple has a longstanding relationship with ARM back to the latter’s founding. The sale of its large chunk of ownership in ARM helped Apple survive in its late-90s reboot. So it’s quite possible that their license is quite different from those of the few other hardware licensees.
Also, Apple plays the long game. I’m sure they also have a lot of RISC-V experience by now. Not just weirdo in-house research products; I’d be shocked if there weren’t tiny RISC-V cores doing small housekeeping tasks inside some of their huge chips, just for the experience. Maybe even a few inside an Apple pencil or maybe an ipad screen digitizer since the computation isn’t really user visible.
As does ARM: if RISC-V ever becomes airborne (it’s still speeding down the runway) I suspect ARM will haul out a stack of patents and start demanding payment. Apple’s license surely covers them here.
Seriously though, people decrying this as financial engineering seem, to me, to be completely missing the point. It's not the purpose of a firm to endlessly expand their business until they do everything. It's to do the thing they are good at, what they have a comparative advantage over the rest of the industry over, and then instead of chasing ever worse roi on ever more marginal investment and research, return the rest of the money to the investors so they can make their own choices on what to invest on.
I think that is fallacious thinking. Apple tried hard with the Newton but larger, infrastructure pieces were not yet in place. Meta has tried hard with VR but there is no evidence that a large population even wants this tech.
Apart from AI, we may simply be in an innovation desert for the consumer tech companies. Things like the portable digital music player, smart phone, might only come every decade or so — and no amount of R&D will force that to behave any differently.
Crazy thought but I know one larger entity to park the money in and it's the US treasury. Apple has no positioning to improve things like infrastructure and public education.
Stock buybacks should be a clear signal that taxes can go up at that bracket of the economy.
While this is true, investors would generally rather have the money returned to them so they may diversify their portfolios as they see fit instead of letting the company do it for them. (at least for spherical cow investors)
Should they spend it on an acquisition when most large acquisitions fail to add positive value?
Even if they could find an attractive large acquisition target, some regulator somewhere in the world is going to block it.
That's precisely what this is. It's financially prudent for a company with this much cash to buy back their stock when it's (relatively) cheap. It also doubles as signaling to the market. It's cheaper and better than issuing dividends.
In addition to accounting/reporting, the CFO's job is to decide if/where to spend capital and if/how/when to return it to shareholders.
Buying back stock when the price drops is not really financial engineering—it's just finance, period.
From https://www.bamsec.com/filing/32019324000069?cik=320193
> During the six months ended March 30, 2024, the Company repurchased 248 million shares of its common stock for $44.0 billion. The Company’s share repurchase program does not obligate the Company to acquire a minimum amount of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
> In addition to its contractual cash requirements, the Company has an authorized share repurchase program, under which the remaining availability was $30.1 billion as of March 30, 2024. On May 2, 2024, the Company announced the Board of Directors had authorized an additional program to repurchase up to $110 billion of the Company’s common stock. The programs do not obligate the Company to acquire a minimum amount of shares.
Dividends can also be taxed differently. There's some nuance there beyond my expertise, but generally share buybacks are taxed more favorably (although there have been recent legislative efforts to change that)
Sometimes companies will buy back their stock strategically because they believe it is undervalued - that’s a long term strategy.
> Sometimes companies will buy back their stock strategically because they believe it is undervalued - that’s a long term strategy.
Depends on how the buyback is deployed (maybe if done in intervals) but I'll assume the announced buyback by Apple is to be done immediately to offset any drawbacks arising from their recent disappointing earnings call.
I'm dismissing that claim unless you can provide anything within the ballpark of reasonable evidence related to that claim.
https://www.investopedia.com/terms/b/buyback.asp
Someone else provided a nice little breakdown [1] of how buybacks work in comparison with dividends.
I recommend you read that, and also actually read the article that you posted instead of continuing to argue a point that you are incorrect about.
Apple specifically has continued to return value to shareholders via stock repurchases over a long period of time. There's nothing artificial or abnormal about their stock buybacks, and you can do the research for yourself to compare their stock buyback programs with the company performance over time.
[1] https://news.ycombinator.com/item?id=40247051
Best of luck in that endeavor and happy investing
Also, the Inflation Reduction Act introduced a 1% tax on stock buybacks starting in 2023[1], so there is still in some sense a tax impact on the remaining shareholders.
[0]https://www.apple.com/newsroom/2024/05/apple-reports-second-...
[1]https://www.irs.gov/newsroom/treasury-and-irs-announce-new-r...
It’s very sad that the Inflation Reduction Act was nothing more than tax increases when it should’ve been solely cuts to wasteful government spending instead. Instead of cutting spending, they did the opposite and increased spending.
Some more discussion, and on official post:
https://news.ycombinator.com/item?id=40242038
https://news.ycombinator.com/item?id=40241119