Do Apple Inc's Stock Buybacks Really Matter For Investors?
Despite a market that's trading at all-time highs, corporations still spent more on buybacks during the first six months of 2014 than in any period of the past seven years, according to research from Birinyi Associates. Atop the list, and by a wide margin, is Apple . In Apple's last four quarters, the company bought back nearly $33 billion worth of stock -- IBM comes in second at $19.5 billion. Given the fact that Apple operates in an industry where innovation means longevity, is the company serving investors best by spending so much cash on its own stock?
Is Apple wasting cash on buybacks?
With nearly $180 billion in 12-month revenue, it's quite difficult for Apple to make investments that move the needle. Certainly, the company could make large acquisitions, but by being a company that owns both hardware and software, Apple already possesses what most technology companies produce.
In addition, Apple is a company whose revenue is expected to grow 5.5% this year and another 12% next year thanks to future sales from the iPhone 6 and iPhone 6 Plus launch, expected near-term launches of new tablets, and future product categories like the Apple Watch and Apple Pay. These devices combined have contributed largely to making Apple the largest company in the world by market capitalization.
In the last three quarters alone, Apple has generated more than $46 billion in operating cash-flow. Meanwhile, Apple has spent just $5.7 billion in capital expenditures, giving it more than $40 billion worth of free cash flow during the same span. In other words, in just three quarters, Apple can not only buyback over $30 billion of stock annually, but also afford its capital expenditures with plenty of cash left over. With only three quarters accounted for, Apple has an additional three months annually to grow its $160 billion of cash and liquid assets even larger.
Do buybacks make a difference?
Albeit, buybacks have most certainly worked to the advantage of shareholders. The proof can be seen in the following chart, showing the performance of Apple's market capitalization versus its stock during the last year.
In essence, Apple's market capitalization increase of 37.23% has been a result of improved operations and bullish investor sentiment stemming from the iPhone 6 units. However, with an aggressive buyback policy in place, thereby reducing shares, Apple's stock has increased an additional seven percentage points more than its market capitalization.
Are continued buybacks wise?
Yet, despite the overwhelming $33 billion that Apple spent for buybacks, the key takeaway is that the aggressive spending has not negatively affected Apple's underlying business. As seen below, Apple's generation of cash from operations alone surpasses the money it spent on buybacks by a wide margin.
Essentially, Apple's ability to buyback enough stock to create shareholder value while still managing to grow its cash position is a reflection of strong management within the company. At this point, the continuation of large buybacks from Apple is a good indication to keep buying its stock, as it serves as added protection against downside selling pressure, and because the company can afford it.
During Apple's last quarter, it bought back $5 billion worth of stock, and at just 13.7 times next year's expected earnings, Apple's stock remains foolishly cheap. In other words, buybacks should remain robust, and are likely to keep adding shareholder value, thus amplifying the investment opportunity that lies ahead.
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The article Do Apple Inc's Stock Buybacks Really Matter For Investors? originally appeared on Fool.com.Brian Nichols owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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