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Can you explain why its good to repurchase stocks? I never understood why a corporation buys itself back.
Consistent with my general philosophy relating to equity investing, I'm generally not a fan of public corporations returning capital to shareholders. That said...
For some corporations, there comes a point where they have much more capital than they can foresee ever needing for business purposes. When they reach that point it makes sense to return that excess capital to shareholders. What else would they do with it?
Apple reached that point many years ago. It has more than enough cash flow to fund all of the R&D, and other operating expenses, that it thinks make sense. And It isn't interested in making large acquisitions. Further, if it ever needed funds for unexpected reasons - e.g., if its general philosophy regarding large acquisitions changed and it wanted a lot of cash to buy another large company - it would likely be able to raise the cash it need through, e.g., debt issuance. (Again, that's not something it foresees needing; but even without a large net-cash pile it would have access to lots of funding.)
So, when it makes sense to return capital to investors, the question becomes how to do so. For the most part, the options are dividends and buybacks. I think buybacks are the better option, especially when we're talking about returning large amounts of capital to shareholders. If for no other reason, buybacks give shareholders more flexibility when it comes to the timing of tax liability.
If a corporation thinks its shares are significantly long-term undervalued, then buybacks make great sense. And those within corporations - e.g., board members and executives - are generally well positioned to assess whether those corporations' shares are long-term undervalued.
Stock buybacks don't always turn out well for shareholders. It depends on the circumstances. They can sometimes be used to bolster share prices in the absence of solid underlying performance by the business. But sometimes they turn out very well for shareholders, particularly when they happen while the corporations' shares are significantly undervalued. For good or bad, buybacks tend to concentrate - effectively intensify - future stock price movements. That's what's happened with Apple, to the benefit of its on-going shareholders.
Apple has now bought back nearly 2.5 billion shares at an average price of $130. If is effectively nearly $500 billion ahead on those share buybacks. By that I mean, the effective cost of those buybacks is around $320 billion (taking into account dividend savings and net-interest losses) and those shares would be worth more than $800 billion at the current share price.
Sometimes it isn't clear whether certain buybacks helped a corporation's share price. But in Apple's case it's pretty clear that the buybacks have. To believe that Apple's share price would be as high as it is now, all other things being equal but with Apple not having spent the $300+ billion to buy back those 2.5 billion shares, you'd have to believe that the market would value Apple $800 billion more than it does today (at over $2.2 trillion) - with the difference being that Apple had $320 billion more in net-cash on its books.
I don't think there's any real possibility that would be the case. Assuming the market would value additional net-cash on Apple's books at 1-to-1, giving Apple a market cap $320 billion higher than it is today, its share price would be about $253. This isn't a perfect method for considering the effect of the buybacks on share price, but it does give us an idea of the possible effect of the buybacks on share price - as compared to Apple having continued to hold that cash.
We might also consider the situation this way. If Apple had a need for that cash, it could get it back by issuing and selling new shares. As I indicated before, those 2.5 billion shares - which, if reissued, would leave shareholders at the same dilution they'd have been at without the buybacks - would be worth more than $800 billion at the current share price. Even at an average price of $200 per share, Apple could raise $500 billion - and effectively be nearly $200 billion ahead.
Again, stock buybacks aren't always a great benefit for shareholders. But in Apple's case, I think its buybacks over the last 8 years represent - taking into account their scale - one of the greatest financial moves of all time. Apple has, through its buybacks, created an incredible amount of wealth for its shareholders in addition to the wealth it's created through normal business operations.
I'd make one last point about the idea of returning capital to shareholders. Under most circumstances I don't think it makes sense for a public corporation to return capital to shareholders (other than, perhaps, a small amount through dividends). But that possibility has to be out there, otherwise there wouldn't be much point to equity investment. If there wasn't an expectation that a given corporation might eventually return capital to investors (or be bought, which would represent a return of capital or a potential return of capital through the acquirer), why would anyone pay more for its shares? To sell them to someone else at a higher price, sure. But why would that someone else pay for them? If capital wasn't ever going to be returned, what value would the shares have? Liquidation?