Can someone explain to me (a person who does not know much about finances) what Apples tactic is with a share buyback? Why do they do this and how does it help them?
Near term, buy backs stabilize your share price. Share price is a major driver of many incentives inside Apple as well as perceptions without.
Long term, Apple is betting their shares will increase in value.
Investors are not rational or accurate in their assessments of a company’s performance (why market “expectations” is the bar, not performance), stock markets are not perfect information systems, and most finance professionals regard stock price as the final say on a company’s performance & value.
Put together, this means a company’s best defense (when as successful as Apple) against being under-priced in the stock market is to buy back their own stock. To do that, you need a massive cash war chest or sources of cash like PE/hedge funds/etc. so far only companies with the first option live very long.
The business has cash saved up. It has 3 options. Give the cash to the business’ owners, spend the cash on improving the business (such as R&D), or keep the cash sitting around.
And businesses often times do all 3 in varying amounts.
However, for a publicly listed business, giving cash to the business’s shareholders is taxable income. An equivalent way to reward shareholders without requiring shareholders to pay tax now is to buy outstanding shares and hence causing the price to go up because the supply of shares relative to demand goes down.
Also, if a publicly listed business awards equity to employees, such as RSUs which tech companies famously do, then buying back shares simply negates the effect of that since giving the employee equity increased the supply of shares relative to demand.
An executive is also just an employee. So I am not sure what you are implying there. If it’s malfeasance between the shareholders, board of directors, and c suite, you will have to be more explicit.
This is ignoring the fact that existing shareholders benefited by not having to pay the employees more cash in lieu of the options/RSU. For example, existing shareholders could have benefited from higher dividends due to higher cash flow, or greater appreciation in stock price due to bigger stock buybacks due to higher cash flow.
The two effects should cancel each other out.
I acknowledge there is an effect on employee compensation. How it actually plays out is not a simple linear one though (esp. since the comp decision is made at grant time and the impact is seen a while later with different assumptions). The induced incentives and behavior can be different depending on the model chosen.
> The two effects should cancel each other out.
Not sure the math is as clear cut as canceling each other. Maybe. Probably not.
Apples cash pile (~70bn) is very diminished from their hoarding / tax dodging days when it was >200bn. This cash is of course offset by ~100bn in debt that they have, most of which was issued at around 2% and when rolled over in the coming years will be reissued at >5%.
There are two ways companies can provide value to investors through their shares - pay dividends or do buybacks.
Buying shares trades cash for dilution.
These are simply inverse operations.
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MyCorp has 10 million shares, valued at $10 each, for a market cap of $100m.
Next year, its market cap grows by $15m, resulting in a per-share valuation of $11.50.
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But suppose MyCorp had first done a $5m buyback. Then it would have 9.5 million shares, valued at $10 each, for a market cap of $95m.*
Next year, its market cap grows by $15m, resulting in a per-share valuation of $11.58.
The shareholders' "bet" is that MyCorp would increase its market cap, even it gives up $5m of cash. In this case, the bet paid off.
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* Note that buybacks (and fundraising) change the capitalization but do not immediately raise or lower the value of the stock, in a perfect market. It if it did, it would be hard to buy/sell the stock. Rather, it increases shareholders exposure to rewards/losses later (i.e. the opposite of dilution).
When a company buys back it stock, that removes from the market available shares to buy.
a. So now, the companies EPS gets boasted because the total # of shares outstanding is a smaller denominator.
b. Conversely, a lot of tech companies give stock options to employees. This (increases the # of shares) and dilutes the number of shares outstanding which then hurts your EPS.
So it’s also common for a company to offer employee stock options and then perform a stock buyback, to neutralize the EPS swing.
1. Pay dividends 2. Buyback shares
Microsoft and now Google started paying dividends. Apple is choosing buybacks.
Both options also mean that these companies have run out of ideas for further growth and are now transitioning into cash cows with reduced future growth prospects.
That's not true, it's simply means they have more cash then they can invest. Not that they do not invest any more.