Why Would Apple Want To Buy Back $14B Of Its Own Shares?

Buybacks are not uncommon in the business world, and with Apple being such a huge company, it makes perfect sense that it would engage in them from time to time. But what does this buyback mean for Apple, and was it the company’s best option?

Early last month, Apple repurchased $14 billion of stock in the two weeks after releasing its disappointing FQ1 results. Apple purchased $12 billion via an accelerated share repurchase program and $2 billion on the open market. To date, Apple has acquired $40 billion in stock during the past year, which CEO Tim Cook said was the record for any company over a similar span, as part of a plan to buy back a total of $60 billion worth of shares. Cook also says that Apple has pledged to return $100 billion to shareholders by the end of 2015.

Why Apple Bought Back Shares

A company buying back its own stock is generally thought of as a sign of confidence in the company’s future and a sign that it believes its stock is undervalued. Apple’s reasoning is firmly along those lines. Cook said that the move “means that we are betting on Apple. It means that we are really confident in what we are doing and what we plan to do. We are not just saying that. We are showing that with our actions.” He calls the strategy an “opportunistic” and “aggressive” approach to stock buybacks.

This statement runs alongside Cook’s promise that Apple would be launching a new product this year, which many predict will be the iWatch. This may have some or a lot to do with Apple’s current confidence in its future and in its stock.

The buyback also comes after its less than optimum FQ1 results were announced, which led to sharp drops in shares even though Apple beat Wall Street expectations on both the top and bottom line and also sold a record 51 million iPhones in that quarter. Even though it was a record amount of iPhones sold, Apple had still experienced lower-than-expected holiday-period iPhone sales and then released the weak revenue forecast following. These sales fell short of expectations in a quarter when the company had introduced two new iPhone models for the first time.

Apple took advantage of this slump in stock price and was able to buy even more shares for the $14 billion it spent.

The company was sitting on about $160 billion in cash as of December 28, 2013. The company has been coming under pressure to do something with this mountain of cash for some time, beginning with Greenlight Capital hedge fund manager David Einhorn in early 2013.

Carl Icahn, a chief investor in Apple stock who recently increased his Apple stake by $500 million to about $3.6 billion, has been urging Apple to buy back its shares for months now. His original idea was for the company to go on a massive debt sale to find $150 billion in buybacks, which would have equaled Apple’s entire cash balance. He dropped this idea and then suggested that the company pursue $50 billion in buybacks by the end of September.

However, Apple had recommended investors vote against Icahn’s proposal, and other proxy-advisory firms spoke out against the proposal as well. After this strong opposition, Icahn then dropped his effort to encourage the company to buy back more stocks just a few days after the $14 billion buy back.

Excluding the latest purchases, Apple had already returned $7.7 billion to shareholders through dividends and buybacks in the December quarter, which brought the total amount under its capital return program to $43 billion.

After the most recent buyback went through, Cook told the Wall Street Journal that Apple would issue updates on the buyback and dividend program in March or April.

What Else Apple Could Have Done With $14B in Cash

Some investors have likely been left confused over why exactly Apple decided to buy back its own shares rather than put that cash toward something else. Critics of the deal argue that this move was purely financial engineering and that Apple is merely trying to prop up earnings per share. Others have different ideas about how that money could have been used instead.

For example, Apple could have easily acquired a new company, or even multiple companies, with that amount of money. For example, the buyback is several times larger than the size of recent, potentially game-changing acquisitions made by Google, one of Apple’s chief rivals, such as when the company bought Nest, a smart home device producer.

Apple also could have dedicated this amount of money toward significant research and development. With Apple on the verge of releasing a new product—potentially one that already has many competitors on the market—one might think that Apple would throw more money toward the R&D of such a technology to make it the best it can be come release time.

Or, Apple could have used that money for the R&D of products still not near market release at this time, products that have yet to be imagined, such as the original revolutionary releases of the iPod, iPhone and iPad, Apple’s latest new major product released back in 2010. If Apple wants to remain competitive in today’s tech world, it’s going to need to continue to push out innovative products that can compete with its more accessible and less expensive competitors, such as Samsung and other Google Android OS-enabled phones.

Regardless of how Apple could have spent that $14 billion, the deal is done, and Apple is now the proud owner of about 27 to 28 million of its own shares, depending on what the average price was. Apple had ended FQ1 with about 892.45 million shares outstanding, so this move will now reduce the outstanding share account by about 3 percent.

Certainly Icahn and other stakeholders are pleased with this announcement. With Apple’s plans to continue buying back shares over the next year, we will have to wait and see how these moves end up benefiting Apple’s, and its stockholders’, bottom line.

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