Why would a company like Apple be buying back its own shares?

Question

What is the reason that a company like AAPL is buying back its own shares? Does it have too much cash and it doesn't know what to do with it? So it is returning the cash back to investors?

Answer 1

A Breakdown of Stock Buy Backs has this bottom line on it:

Are share buybacks good or bad? As is so often the case in finance, the question may not have a definitive answer. If a stock is undervalued and a buyback truly represents the best possible investment for a company, the buyback - and its effects - can be viewed as a positive sign for shareholders. Watch out, however, if a company is merely using buybacks to prop up ratios, provide short-term relief to an ailing stock price or to get out from under excessive dilution.

Read more: http://www.investopedia.com/articles/02/041702.asp#ixzz3ZHdOf2dJ

What is the reason that a company like AAPL is buying back its own shares?

Offsetting dilution would be my main thought here as many employees may exercise options putting more stock out there that the company buys back stock to balance things.

Does it have too much cash and it doesn't know what to do with it?

No as it could do dividends if it wanted to give it back to investors.

So it is returning the cash back to investors?

Not quite. While some investors may get cash from Apple, I'd suspect most shareholders aren't likely to see cash unless they are selling their shares so I wouldn't say yes to this without qualification. At the same time, the treasury shares Apple has can be used to give options to employees or be used in acquisitions for a couple of other purposes.

Answer 2

I think JB King's answer is interesting from the point of view of "is this good for me" but the OP's question boils down to "why would a company do this?"

The company buys back shares when it thinks it will better position the company financially.

A Simple Scenario:

If Company A wants to open a new store, for example, they need to buy the land, build the store, stock it, etc, etc and this all costs money. The company can get a loan, use accrued capital, or raise new capital by issuing new stock. Each method has benefits and drawbacks.

One of the drawbacks of issuing new stock is that it dilutes the existing stock's value. Previously, total company profits were split between x shares. Now the profits are shared between x+y shares, where y is the number of new shares issued to raise the capital.

This normally drives the price of the stock down, since the expected future dividends per stock have decreased.

Now the company has a problem: the next time they go to raise money by issuing stock, they will have to issue MORE shares to get the same value - leading to more dilution. To break out of this cycle, the company can buy back shares periodically. When the company feels the the stock is sufficiently undervalued, it buys some back. Now the profits are shared with a smaller pool, and the stock price goes up, and the next time Company A needs to raise capital, it can issue stock.

So it probably has little to do with rewarding shareholders, and more to do with lowering the "cost of capital" for the company in the future.

Answer 3

A company has money. What can it do?

1. Invest in its own operations, buying equipment, hiring employees, etc. But Apple may already be doing so much of that, that it doesn't find additional activities likely to be profitable.

2. Invest in external operations, buying a supplier or customer (vertical integration) or a competitor or unrelated business (horizontal integration). But again, Apple may not want to do this. It may worry about anti-trust concerns. Or it may just not find potential purchases as profitable as it itself is.

3. Just plain invest. Play the stock market. Put money in a bank. Whatever. But Apple has had a better return than banks and the average stock.

4. Pay dividends. This makes its shareholders richer, but it actually reduces the value of the stock (because the company has fewer assets). It may prefer not to do this so as to keep the stock price up. A high stock price means that they get more value from employee stock options.

5. Buy stock back. The company has fewer assets and it has fewer shares outstanding. The net effect is a wash, because assets per share stay the same. This can increase the stock value if investors were worried that the company would have done something dumber with the money (e.g. overpay for a competitor or invest weakly).

For a successful company, buying the stock back does the most to maintain or even increase the stock price. It also cleans out the least supportive investors. Because they are the first to sell.

Taken to extremes, this can cause even supportive investors to decide to take the profits. Paying a dividend encourages investors to hold onto their stocks (to get future dividends) even as it drives the price down (fewer assets per share). So companies like Apple typically try to balance the two so as to maximize their value. Because executives are often shareholders and want to optimize their own wealth. Executives may also anticipate future stock grants. With a buyback program, they essentially sell vested shares back to the company (which in this scenario has plenty of money).

Answer 4

In the case of Apple, they have plainly too much money to invest in meaningful ways, that is in a way that will produce profit, and doesn't distract management from their main business. They surely don't want to make mistakes like HP's Autonomy acquisition ($8.8bn write-off). They tend to buy companies only because they want what these companies make.

The two common methods to return money to the shareholders are buyback and dividend payments. Apple does both. In the case of a dividend payment, each dollar in dividend means the company is worth one dollar less per share. Buyback is slightly different: If Apple believes that it's worth $100 per share, and the share price is $80, then buying 10 million shares means the value of the company drops by $800 million, but the value per share has actually gone up. Similar, if the share price is $120, then buying 10 million shares would be throwing money away (10 million times $20), so a buyback program will be authorized, but shares will be bought back only if Apple thinks the price is good for buying.

Answer 5

Does it have too much cash and it doesn't know what to do with it?

Yeah, in a big picture sense, that is pretty much true.

Dividends, stock buybacks, and similar things are what a company does when it wants to give value back to shareholders. The implication is that it doesn't have any "better" things to spend that money on. Logically, if it did, it would.

Usually companies in growth phases with a clear direction spend all the money on achieving their goals (for example Tesla) and don't pay dividends/do buybacks. Companies like Apple that have a huge amount of cash, and not enough ideas on what to spend it on, are more likely to issue dividends/do buy backs.