Apple has spent a whopping US$651.4 billion on share repurchases from September 2011 to December 2023.
For perspective, Broadcom, the 9th largest company listed on the US stock market, currently has a market cap of US$617 billion. Apple could have bought the 9th largest listed company in the US using the cash it spent on buybacks. This brings us to the question, were Apple’s share buybacks the best use of its cash?
How much return did the buybacks create?
To judge if Apple made the right decision, we need to look at how much earnings per share growth the buybacks achieved.
Back in September 2011, Apple had roughly 26 billion shares outstanding on a split-adjusted basis. As of 20 October 2023, the date of the regulatory report for the fiscal year ended 30 September 2023 (FY2023), Apple had 15.55 billion shares outstanding. This is a 40% drop in shares outstanding. The lower share count, achieved through buybacks, has had a profound impact on Apple’s earnings per share.
In FY2023, Apple generated US$97 billion in net income and US$6.13 in diluted earnings per share. If the buybacks didn’t happen and Apple’s shares outstanding remained at 26 billion for FY2023 – instead of 15.55 billion – its diluted earnings per share would only be US$3.73 instead of US$6.13. Said another way, if Apple opted not to reduce its share count, the company would have needed its net income in FY2023 to be higher by US$62 billion in order to generate a similar diluted earnings per share figure.
So, Apple’s US$651 billion investment in share buybacks has created US$62 billion in “annual net income” to the company, and possibly more in the future as Apple’s net income continues to climb.
Could it have done better?
Although it’s clear now that Apple’s buybacks have had a positive impact on its diluted earnings per share, the next question is if the buybacks were the best use of the company’s capital.
Broadcom, the company whose market cap is close to the cumulative amount Apple has spent on buybacks, generated net income of US$14 billion in its most recent fiscal year.
If Apple had bought Broadcom instead, it would only have generated US$14 billion more in net profit, far less than the implied US$62 billion growth achieved from buying back its own shares. This would have resulted in substantially less earnings per share growth than the buybacks. In comparison, Apple’s buybacks seem like a good investment decision.
I know that using Broadcom as an example may not be the best comparison as Apple could have bought Broadcom for much less in 2012. Nevertheless, it gives some perspective on the different possible uses of capital.
Conclusion
Was buybacks the single best use of cash for Apple? Probably not. But was it a bad investment? Definitely not. The return on investment through Apple’s buyback program has resulted in a large jump in its earnings per share. The US$62 billion “increase” in annual earnings could also continue to rise if Apple’s earnings grows over time. Although there could possibly have been better investments, I think Apple made a decent decision to focus on buybacks over the past few years.
But should Apple continue buying back shares? This is the question on everyone’s lips right now, especially with Apple recently announcing a new US$110 billion buyback authorisation.
Buybacks provide a good return only if shares are trading at cheap valuations. Apple’s management needs to continue evaluating the company’s valuation when making future buyback decisions. With Apple’s valuation increasing in the past few years, management will need to decide if conducting buybacks today still provides good value for shareholders or if other forms of investments will be more impactful.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in Apple Inc. Holdings are subject to change at any time.