Apple's Stock Reached New All-Time Highs This Week

[MacBH928]

A stock buy back, which Apple does all the time, is simply a way for a company to directly return money to specific shareholders who want "out". Those are the folks selling their shares. Many Apple shares are sold every day, an equal number are bought. That is why we have stock prices. Apple does buy backs and then retires the shares (i.e., those shares will no longer get dividends and they won't be voted in shareholder votes for the board of directors). So the remaining shares now have a slightly larger percentage of the future dividends and asset value of Apple. So they are slightly more valuable. Apple specifically reduces the supply of publicly traded shares.

Companies do this instead of sending out dividends mainly because dividends get taxed. Also there are historical and market reasons that a company does not want to ever decrease their dividend. The stock market price of a company that does that gets immediately reduced. So companies tend to be very conservative about what their dividend is and they set it at a level they are very confident they will always be able to pay. Each decision to raise the dividend is weighed against the risk of ever not having enough available cash to pay it in the future years. Apple pays a modest dividend. But has had so much cash coming in for so long, they started doing stock buy backs.

so buy back is used to raise share value instead of giving dividend out right so they don't get taxed? thats it? thats the reason?

 

[Abazigal]

I would highly appreciate it if you could explain to me the idea about stock buy-back. I know in a simplified manner this is basically some partners are paying to buy out the other partners, but why is this good? You are paying for it either ways its not "free shares" . Why does Apple care to do that? And who is going to sell when everyone thinks Apple is only going to grow bigger and bigger?

Above Avalon: Apple Won the Share Buyback Debate

I receive many questions about Apple from Above Avalon readers, listeners, and members. In previous years, one topic has been far ahead of any other as a source of questions. Everyone wanted to know about Apple’s share buyback program. Why is Apple buying back its shares? Is Tim Cook trying t

www.aboveavalon.com

This article does a fairly good job of breaking down why Apple does share buybacks, and why it’s working for them.

Basically, it boils down to Apple having more cash than they know what do do with, so buying back shares helps them achieve a cash neutral position. It’s really a way of returning excess cash to the shareholders.

There is a more in-depth explanation that’s for paying subscribers only, but the gist of why Apple doesn’t pay a special one-time dividend is because investors value predictability in the market, so Apple prefers to pay out a stable dividend amount every quarter and avoid changing it too much. This also means Apple doesn’t have to keep adjusting their dividend payout every year depending on how well or poorly the company does.

At the same time, repurchasing shares means lesser shares outstanding, which means that Apple will actually pay out less dividends in the future. This means that in the long run, Apple actually stands to save more from the cash dividends they avoid paying out in the future, compared to the amount they are spending now to repurchase shares.

My guess is that Apple will be able to set aside $12-15 billion every quarter for share buybacks. Eventually, Apple will hit a wall as to how much shares they can buy back (because the more shares you buy back, the less there are in the market, and so the more expensive each outstanding share will be), but until that day comes, the math behind it appears to be financially sound.

Again, all this works because Apple is basically making more money than they know what to do with.

 

[TallManNY]

so buy back is used to raise share value instead of giving dividend out right so they don't get taxed? thats it? thats the reason?

That is the reason. If you give out a dividend, all the shareholders receive their dividend and that dividend gets taxed. If you do a buyback, the person who sold their shares to Apple, they will have to pay a tax on the profit of that sale (if there is a profit based on what they paid when they bought the shares). But the person selling their shares knows about this tax is coming and has decided it is time to get out of Apple even if they have to pay a tax on their profit (this is called capital gains). Or they might have losses from a different stock that they can use to offset the capital gains from the Apple stock. The shareholders who don't sell their shares, those shares will go up a tiny bit in value, but that increase in value isn't taxed until those shareholders sell.

Yes it is a lame reason. Politicians regularly consider passing laws stopping companies from buying back their own shares. It is also arguably quasi-insider trading because the company (especially a company like Apple) has access to tons of information (especially information about future pipeline of products) so they might know better if their stock is undervalued.

 

[MacBH928]

Above Avalon: Apple Won the Share Buyback Debate

I receive many questions about Apple from Above Avalon readers, listeners, and members. In previous years, one topic has been far ahead of any other as a source of questions. Everyone wanted to know about Apple’s share buyback program. Why is Apple buying back its shares? Is Tim Cook trying t

www.aboveavalon.com

This article does a fairly good job of breaking down why Apple does share buybacks, and why it’s working for them.

Basically, it boils down to Apple having more cash than they know what do do with, so buying back shares helps them achieve a cash neutral position. It’s really a way of returning excess cash to the shareholders.

There is a more in-depth explanation that’s for paying subscribers only, but the gist of why Apple doesn’t pay a special one-time dividend is because investors value predictability in the market, so Apple prefers to pay out a stable dividend amount every quarter and avoid changing it too much. This also means Apple doesn’t have to keep adjusting their dividend payout every year depending on how well or poorly the company does.

At the same time, repurchasing shares means lesser shares outstanding, which means that Apple will actually pay out less dividends in the future. This means that in the long run, Apple actually stands to save more from the cash dividends they avoid paying out in the future, compared to the amount they are spending now to repurchase shares.

My guess is that Apple will be able to set aside $12-15 billion every quarter for share buybacks. Eventually, Apple will hit a wall as to how much shares they can buy back (because the more shares you buy back, the less there are in the market, and so the more expensive each outstanding share will be), but until that day comes, the math behind it appears to be financially sound.

Again, all this works because Apple is basically making more money than they know what to do with.

thanks that was informative, I never understood why a company buys itself back. Surprised there is a site dedicated for financial analysis of Apple. Also very responsive.

More cash than they know what to do with, now thats a real 1st world problem. Shouldn't they give it all away? Thats the point of making a business any way to make money? I don't assume anyone is taking his share value to the grave.

There is a lot of things they could use that money, grow the Appletv+ library, invest more in FinTech like Apple Pay, CPU, Wifi modems for cellphones, making Siri actually smart, IoT, the smart car (I am against it but they think its going to sell) ... lots of stuff.

That is the reason. If you give out a dividend, all the shareholders receive their dividend and that dividend gets taxed. If you do a buyback, the person who sold their shares to Apple, they will have to pay a tax on the profit of that sale (if there is a profit based on what they paid when they bought the shares). But the person selling their shares knows about this tax is coming and has decided it is time to get out of Apple even if they have to pay a tax on their profit (this is called capital gains). Or they might have losses from a different stock that they can use to offset the capital gains from the Apple stock. The shareholders who don't sell their shares, those shares will go up a tiny bit in value, but that increase in value isn't taxed until those shareholders sell.

Yes it is a lame reason. Politicians regularly consider passing laws stopping companies from buying back their own shares. It is also arguably quasi-insider trading because the company (especially a company like Apple) has access to tons of information (especially information about future pipeline of products) so they might know better if their stock is undervalued.

yea...I get the dividends part but the shareholders will pay the taxes when they sell eventually so they are not really saving anything. But I understand how instead of giving out a dividend you make more money in stock value. I guess its a smart way to circumvent paying taxes on dividends meanwhile still giving value back to the shareholders.

The way I see it, if they invest that money in some business they probably can make even more money or value to their shareholders - like start your own telecom- assuming it will be successful but they do whatever they want to do.

 

[Abazigal]

More cash than they know what to do with, now thats a real 1st world problem. Shouldn't they give it all away? Thats the point of making a business any way to make money? I don't assume anyone is taking his share value to the grave.

There is a lot of things they could use that money, grow the Appletv+ library, invest more in FinTech like Apple Pay, CPU, Wifi modems for cellphones, making Siri actually smart, IoT, the smart car (I am against it but they think its going to sell) ... lots of stuff.

Also conveniently tackled in a Polymatter video (which I happen to agree with, YMMV).

 

[TallManNY]

yea...I get the dividends part but the shareholders will pay the taxes when they sell eventually so they are not really saving anything. But I understand how instead of giving out a dividend you make more money in stock value. I guess its a smart way to circumvent paying taxes on dividends meanwhile still giving value back to the shareholders.

The way I see it, if they invest that money in some business they probably can make even more money or value to their shareholders - like start your own telecom- assuming it will be successful but they do whatever they want to do.

Yep, eventually you probably pay taxes on the shares when you sell. But two things. First, the shareholder might hold that stock for decades and not pay any taxes on the stock value gain during those decades. It saves money to delay paying the taxes (this is a time value of money concept). Second, and much less of a consideration for most, but if your kids inherit the stock, they get the stock at the value of the stock at the time of your death. They only pay taxes on anything the stock gains after that. This is called a step up in tax basis. It is a major loophole that allows families to transfer inter-generational wealth tax free. There is a limit to this because inheritance tax kicks in (I think at over $10 million, but the laws change on this point often.)

Yes, when Apple does buybacks they are basically telling the market that they can't think of anything better to do with the money. Keep in mind that Apple doesn't do major acquisitions (they worry that acquiring another large company would change their company culture). And Apple spends vast sums of money on research, but they still have money after that. Anything that cost super larger amounts of money to do (like building a telecom) would take huge focus from the executives. Do Apple and its shareholders want Tim Cook to spend a good portion of each week thinking about how to build a telecom? Or do they want him focused on iPhone supply chain? He and the executive team only have so much time in each week and so much focus they can devote to each part of Apple's business.