Apple More than Doubles Capital Return Program | Hacker News Reader

Apple More than Doubles Capital Return Program

apple.com

44 pointsleknarf56 comments

Nothing says "We are out of ideas" quite as powerfully as a company that announces a big share repurchase program.

Do you believe there are untold, unimagined technologies waiting to be invented? Do you believe that the future will be radically different than the present? Then you should be investing, heavily, in the future.

Do you want to be ambushed by the new kid on the block? Do you want to be the overly-confident behemoth who is cut down by the upstart, just as IBM was cut down by Microsoft? Well, then don't invest in the future, just buy lots of your own shares.

Apple intentionally set up a management bottleneck where the CEO tracks all product development pretty closely to ensure everything is "insanely great". The downside is that they can only develop a few products at a time. At least they're now admitting that they'll never have time to spend the money so they might as well pay it out.

What would you do if you were sitting on an enormous cash pile and one of the most ridiculous undervaluations ever?

Share buy back programmes are equivalent to dividends in all but tax treatment. Why should the market capitalization / valuation of the company factor into a decision to pay out to shareholders?

Because when you repurchase shares beneath its intrinsic value it's accretive to shareholder value.

Yes, but judging intrinsic value is something for investors to do. I want my companies to concentrate on what they are good at---and random companies are not good at playing the stock market. (See the other current discussion about Cooper Union (https://news.ycombinator.com/item?id=5599385).)

I think Warren Buffett supports the move:

http://blogs.barrons.com/techtraderdaily/2013/03/04/aapl-whe...

Absolutely, and the best thing that can happen when a company is repurchasing its shares is for the shares to be as cheap as possible, so as to create the most value for shareholders.

Warren Buffett recommended to buy it several years ago if Steve Jobs believed that the stock was underpriced at the time. Buffett was describing to Jobs the advantages and disadvantages of potential ways to spend extra cash.

I'm re-iterating that this was several years ago!

Warren Buffett also never said anything himself about the stock being underpriced. It was all contingent on Jobs's opinion.

[Edit] Original transcript. Unfortunately pdf. Starts at "No, I've never bought Apple.". Stock was around 200 when Jobs talked to Buffett. http://fm.cnbc.com/applications/cnbc.com/resources/editorial...

IBM is pretty much still as big as MSFT FWIW: http://finance.yahoo.com/quotes/MSFT,IBM

Apple has 140 billion dollars in cash.

Pray tell what you think they should do with it? Hire 70,000 engineers for ten years? Start an airline? Buy Wyoming?

Before Steve Jobs took over they were doing what you think they should do--supporting every futuristic project that caught some executive's fancy. Spoiler alert: this was a bad strategy. Wasting excess cash is a common anti-pattern for big companies, such that it's a positive sign when they don't spend money.

Your buy Wyoming idea is genius.

Maybe they should build a superhuman army to take over the world, but then they'd have competition with Google! ;-)

Is it just me or are those some expensive engineers?

$200k/year?

Oh...fudge. I'm a moron who can't math.

Philanthropy?

It's not their money to throw away (even to the noblest of causes), it's shareholders' money and should be used to further shareholders' interests.

It would be absolutely unethical and wrong of them to donate more than the normal amount to charitable causes. Now, should those +$100M executives pay more to charity? I think absolutely yes. But Apple the company (or Google, or Microsoft, or any other company) is there to serve it's shareholders not the whole human race.

They could start with making maps work or, really, any of their cloud services.

Actually maps is getting better organically. It surpasses Google Maps in a number of cities and being vector has a much better overall experience.

The cloud services should be split. iTunes Music Store has been pretty rock solid since its inception. It's really iCloud Sync and the Mail features that need work.

ITMS kind of sucks, actually, and always has. The big issue is that the model of "device tethered to a single laptop" is confusing now that the device is wifi/4g enabled. But even in the iPod/iTunes days, iTunes was always kind of shakey.

Many great companies have purchased their own stock when it has become cheap. A stock buyback often signals that a company thinks that the best investment there is for its cash is its own stock.

That's what they want you to think but the data doesn't support this. Its usually used to offset stock compensation.

Certainly companies may often do things for appearance, rather than for the right reasons, but both Warren Buffet and Peter Lynch have written that one of the best things that a corporation can do with its excess cash is to buy back its own stock when the company is undervalued in the market.

If you assume Tim Cook is a smart and competent CEO, jacking up a share repurchase program signals one thing: him and his advisors think that the most effective deployment of that capital for shareholders is to repurchase Apple shares. This could mean they are just shrugging and have no ideas of what they could possibly work on next, or it could mean that they see the market price of Apple stock as attractive enough to warrant a $100 billion purchase of it. One of these is an absurd proposition, one is backed by countless evidence. What do you think? :)

Compared to a buy back a few months ago, and with Tim's shrewd ways, I'll back the latter - I'd bet that he sees now as a good time to buy, later as a bad time.

I am way happier with stock buyback vs. dividend right now, since the stock is so undervalued. There are also tax benefits to buyback.

I would love to see Apple spend billions each (not tens of billions) on:

1) turning iCloud into something amazing -- an individual, small business, or enterprise framework to do device management, sync, etc. Everything Steve Jobs would have wanted as a consumer service, but also available as SAAS or on-premises, like BES, to manage the phones for a company.

2) Don't go into the enterprise software market, but buy a decent enterprise software company or talent just for talent, and get those guys to make Apple the way to develop enterprise software. Basically everything Microsoft does with MSDN, easy hooks to build for the enterprise, etc.

3) Invest in GitHub, either in equity, or just in first-class support. Integrate GitHub and Apple software development and ideally some app development tool like Parse, so it's easy for power users, enterprise IT, and third party developers to build apps for the ecosystem.

4) Use security as a competitive advantage; build platform security like on iOS for OSX, but even better than the best option out there today (ChromeOS). Great management tools for individuals, companies, developers to do MDM, ERM, etc. Make using Apple devices with Apple-blessed apps and Apple-blessed services actually safe.

5) Make i18n/l10n for the Apple ecosystem better and easier than for anything else.

(disclaimer: I have what for me is a fairly huge open call position in apple options over the next 2 years, so I'm pretty "invested" in Apple's success)

Most of those things involve communicating and partnering with external folks. Apple has no idea how to do that.

How do you think Apple makes its products ? Magic ?

They have to communicate and partner with lots of suppliers from small to large around the world. They also have content partnerships with Twitter, Yahoo, Facebook, Tom Tom, Yelp etc. And the there is the huge array of media partnerships in the iTunes Store.

Seems like a LOT of partnerships actually.

Apple don't communicate and partner. They give orders and expect obedience. The only partnership I can think of is the iBooks one. And it went to court.

They're quite partnerific with their hardware vendors (in Asia, essentially).

Apple used to run an awesome developer program; it's dropped off a lot in the past decade. All the stuff which "forums" do now, used to be directly done by Apple. It's amazing; it used to be as good as MSDN if not better.

They could dominate this today, especially since it's mostly standard open source with only a little bit of Apple extra. There is no reason for Apple not to have awesome web development resources for Apple enhanced platforms (like how Microsoft does with .Net/.Asp/etc.) at the level of what it does with Objective-C. And, since Objective-C is essentially only an Apple thing, Apple should be out in the lead in education making Objective-C a super-approachable language, like Google does with Go.

I confess that I understand very little of this. Can someone explain what does this mean in layman terms?

I did understand that Apple is going to invest more money in its own shares, as a result of which, the portion of Apple, Inc. owned by other investors will be reduced. However -- what does this imply? Is this a general pattern that companies follow at some point in their lifetime?

Again, I apologize for my lack of knowledge in this domain.

It's a way of "giving money back to shareholders" because buying their own shares on the open market means that they inflate the stock price on the market by buying the existing sell orders out there.

A buyback doesn't inherently increase the price of the shares. A buyback works like this: Start with a company with an operating business valued at $750M and a pile of cash in the amount of $250M. You own 100 shares out of 1000 (10%). Your shares are worth $1B * (100/1000) == $100M. The company now does a buyback of $50M. They buy 50 shares from other shareholders and cancel them. You now own 100 shares out of 950 of a company with an operating business valued at $750M and a pile of cash in the amount of $200M. Your shares are worth $950M * (100/950) == $100M.

That doesn't mean the share price won't change in practice, but not because of the math, rather because of what investors make of the decision.

What this means is that each share owned by the public will represent a (somewhat) larger share of Apple. If Apple buys back about 15% of the company (about what the $60B plan they announced represents at curren price) then what was previously 85% ownership of the company will now be 100%: about a 17.6% increase.

I don't think you have it right. The buy-back doesn't make each share owned by the public worth more of Apple. What it does is makes the company own more of its own shares (i.e. more shares are owned privately instead of publicly). The easy way to understand it is to take it to the extreme. If Apple bought every share but one, that one shareholder would not own 100% of the company. If Apple bought every share that would be taking the company private.

I doubt a company could take itself private. Who would own it? Would it own itself?

MaysonL's explanation in the grandfather comment to this one is right. You do have to take into account that the 85% that will now be the new 100% will have less capital on hand, though.

If the stock market price is efficient, the new apple should only have a market cap of 85% of the old one. If it's more (or less), the stockmarket is not really rational..

http://en.wikipedia.org/wiki/Privatization

Different thing: "The first is the buying of all outstanding shares of a publicly traded company by a single entity, taking the company private." That single entity can't be the company itself.

Companies can take themselves private. BestBuy is in the process of doing it right now.

The owners? The stockholders. They just aren't trading their shares on NASDAQ anymore.

MaysonL's explanation is incorrect.

You're all talking past each other. "Taking a company private" has nothing to do with stock buybacks. Stock buybacks are when the company itself buys its own stock and then cancels the shares, which increases the percentage ownership stake of the remaining stockholders. Taking a company private means that a single large investor (or a cooperating group thereof) buys 100% of the shares and then votes to delist the company from the stock exchange and stop trading the shares publicly.

Yes. So a company can't take _itself_ private. Stockholders can take a company private.

Dell is currently also in the process of taking itself private in what could be the largest of it's kind, and a precursor to what we could see coming ahead. Read this article for more about it: http://venturebeat.com/2013/02/05/dell-privatization-marks-a...

Nope you're incorrect. The shares are repurchased and cancelled which increases the stake of the remaining shareholders in the company.

When a company is taken private, what happens is that one group of shareholders buys all the rest of the shares, and removes the company's shares from public trading. This is what Michael Dell and his group are currently trying to do.

You seem to have understood this for the most part. What this really boils down to is simple economics: supply and demand. Apple says they will spend $100 Billion to buy back shares. But who's shares will they buy, yours, mine? How to decide? How does this help shareholders?

Well... as it turns out, people who know about this news will realize that there is an increased demand for Apple Stock (since Apple effectively entered the market to buy their own shares). These people will hold out to sell at a higher price. More buyers means greater value for the product -the stock in this case. Others will follow slowly causing the price to gradually rise, the stock rose ~4.6% after the news broke.

People who want to sell will take the money and sell (at the higher price), while others will hold on, and will be rewarded by a higher share price of their existing Apple shares. Thus, everyone wins!

In theory, companies return money to their stockholders when they don't believe they can profitably invest the money internally. Large mature energy companies are a common example. Stock repurchasing is a way to hand out dividends while avoiding taxes.

For Apple, the problem is they made entirely too much money over the last decade. Apple currently has 140 Billion dollars in cash and a market capitalization of 380 billion (including the cash, so estimated value of Apple minus the cash hoard is 240 billion). That's a ridiculous amount of money, and there's no way Apple can effectively invest it, so they are giving it back to the investors so they can invest the money elsewhere.

Hacker News readers who are interested in how share buybacks work and how they can be a very good idea (even in the tech industry) should read up on Henry Singleton & Teledyne:

http://en.wikipedia.org/wiki/Henry_Earl_Singleton http://observer.com/2003/04/the-brain-behind-teledyne-a-grea...

Think of it as a way to reinvest in the future of your current business without having to actually expand it (which, in the case of a company at Apple's size/stage, would likely be wasted on low-returning incremental investments). Apple returning capital is a good thing -- it's how businesses should work.

I'm so torn about this.

As a shareholder, it's great news for me. But as a member of the tech industry and generally idealistic guy, it hurts to see them bending to the calls of the finance industry.

I agree with you the fact that WallStreet continues to bend them for about a couple of weeks just so they could control the market. Maybe Apple needs to go private so there won't be anymore pressure from the so called finance industry and they could concentrate again to build awesome products.

How could they possibly raise roughly 250b (when you subtract their cash) to take the company private?

> Maybe Apple needs to go private so there won't be anymore pressure from the so called finance industry and they could concentrate again to build awesome products.

This doesnt really make sense in Apple's case since they're at a such a gigantic size. The closing market cap 381B - cash 145B is a huge number. Who's going to pitch in to buy the rest of those shares? Good luck getting that done without any input from those you call the "finance industry".

It is not the finance industry which would push for this, it is the shareholders. When you take a company public, you give away some control of the company. Now some of those controlling interests think that Apple shouldn't sit on one of the largest cash reserves in history. If you don't like this, work with private companies.

I agree with you that the shareholders control public companies (mainly by the stock price). In a free market this would mean that the stock holders have indirectly indicated that it is best for Apple to give back cash instead of hoarding it because they feel Apple has no better investment they can make. IMO Apple has so much in cash reserves that if they tried to invest most of it they would be very loose and would make not so lucrative investments, so it may just be best that they return some of it back the way they are, and also invest some more in R&D.

I think this is a reaction to textbook Wall Street game-playing. A nice network of hedge managers went 5-6x on aapl, they sell it and bring the price down while "analysts" come up with all this bs about how Apple's record setting quarter doesn't meet their "expectations".

At the same time, I think Tim Cook has to be a little more vocal. It may not be the Steve Jobs way, but I think its ok talk to the press solely for the purpose of inspiring confidence in your company as opposed to waiting for product releases .

Reply on news.ycombinator.com