Apple announced historic quarterly results this week: record revenue of $91.8 billion, and record net income of $22.2 billion.
Apple also announced that it spent $20 billion on a strategy that is provably bad for shareholder value.
Photo by Jp Valery on Unsplash
This past quarter the company “returned” nearly $25 billion to shareholders, Apple CFO Luca Maestri said. That includes $3.5 billion in dividends and equivalents, and a whopping $20 billion in share repurchasing. Apple’s stated goal is to reach a “net cash neutral position over time,” he said, meaning the company’s massive quarter trillion dollars worth of cash on hand all has to go.
We … returned nearly $25 billion to shareholders … including $20 billion in share repurchases and $3.5 billion in dividends and equivalents, as we maintain our target of reaching a net cash neutral position.
That sounds good, right?
Returning money to investors certainly makes sense on the face of it. They are, of course, the “owners” of the company.
Unfortunately, historically over the past five years share repurchasing has resulted in significantly worse performance. In fact, over the last five years, companies that do share buybacks have have achieved worse results than the S&P 500, as you can see in this chart. Here’s the S&P 500, with an average return of 60%, compared to an exchange-traded fund, SPYB:
SPYB tracks an “equally weighted equity index comprised of 100 companies with the highest stock buyback ratio within the S&P 500 Index,” according to ETF.com.
Stock buybacks have been a major force driving market increases, says Bert Dohmen of Dohmen Capital Research. It’s also a “great financial engineering gimmick to enrich top executives and make the performance of their companies look better.”
They reduce the number of share available. All of a sudden, the earnings-per-share report next quarter looks amazing … even though you’re now comparing apples to freight trains. Total profits can decline even while earnings per share go up.
Do buybacks really help the stock price? It is easy to assume that, but the market is smarter. The big hedge funds know that this is just plain deception.
I’m not suggested Apple is doing this for smoke and mirrors. This was a record quarter by all accounts, after all.
(Although the company is making it tougher to do performance analytics, no longer reporting numbers of phones sold and other key metrics.)
What I do wonder is whether there is a lack of imagination at the highest levels of Apple in terms of using its $245 billion cash hoard to make the company more competitive. To invest in new high-growth areas. To potentially make acquisitions that can solve real problems.
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Apple could also invest in its smart home strategy. Smart home is a fast-growing segment that is projected to hit $632 billion in global value by 2026, but Apple has essentially conceded defeat, kicking off a major revamp of its strategy late last year.
Apple is weak in AI, as anyone who’s see the dumpster fire that is autocorrect in iOS 13 knows well. It could use some of its cash to improve there (it is, but probably not fast enough).
Ultimately, you would hope that Apple would invest in growth rather than take the easy way out and shoveling cash back into its stock price. Historically, that does not increase shareholder value.
And it certainly doesn’t increase Apple’s competitiveness.