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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

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?

dcchambers 2y ago
Not an expert by any means, but my understanding is that share buybacks basically increase the value of the remaining shares by reducing the total number (it indirectly helps raise the price anyway). It's a way to help elevate the stock and keep investors happy if results are less than stellar...and Apple has cash to burn. There are two ways companies can provide value to investors through their shares - pay dividends or do buybacks.
- otterley 2y ago
  Buybacks have tax advantages, which could be another reason Apple opted for it instead of a dividend. https://www.taxpolicycenter.org/sites/default/files/publication/165800/what_is_the_us_tax_advantage_of_stock_buybacks_over_dividends.pdf https://www.taxpolicycenter.org/sites/default/files/publicat...
brutus1213 2y ago
I think it boosts share price. Supposed to reduce tax burden vs. just giving investors dividends? With dividends, I think valuation only gets affected if it is done on a regular cadence (so old companies that are cash cows but don't really grow). IBM used to do this crap a lot but also promised a target dividend (back in the 2010s). IBM may have borrowed to pay dividends .. again some kind of financial engineering which may have made sense.
saulpw 2y ago
It undilutes the stock, indirectly raising the stock price. I've heard it's like paying a dividend, except taxed differently. So shareholders should be happy, and the executives at the company who are making this decision typically own a bunch of shares as well, so they should make out. If Apple thought they could spend $110B more efficiently, I guess they would. But it's difficult to deploy massive capital.
lowkey 2y ago
When a company reaches saturation in their core market and can no longer find new ways of investing free cash flow from the business into new markets that are likely to grow the value of the business greater than their cost of capital it has two options: 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.
- pinkgolem 2y ago
  >have run out of ideas for further growth That's not true, it's simply means they have more cash then they can invest. Not that they do not invest any more.
  - jen20 2y ago
    They also pay a dividend: https://investor.apple.com/dividend-history/default.aspx https://investor.apple.com/dividend-history/default.aspx
  - lowkey 2y ago
    Clarifying, they have run out of ideas for profitable growth net of the cost of capital.
alberth 2y ago
Earnings Per Share (EPS) 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.
paulddraper 2y ago
Selling shares trades dilution for cash. Buying shares trades cash for dilution. These are simply inverse operations. --- 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. --- 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. --- * 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).
sirspacey 2y ago
When you have an absolutely massive amount of cash, like Apple, there are near term and long term benefits to a buy back. 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.
- lotsofpulp 2y ago
  The answer is far simpler and less cynical. 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.
  - SamReidHughes 2y ago
    Long term, buybacks aren't about supply/demand -- they increase a share's percentage ownership of the business.
    - tw8345 2y ago
      Primarily they are used to reward executives who have options and therefore get a disproportionate gain on the buyback.
erikson 2y ago
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SushiHippie 2y ago
Thanks for all the answers!

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?

dcchambers 2y ago

Not an expert by any means, but my understanding is that share buybacks basically increase the value of the remaining shares by reducing the total number (it indirectly helps raise the price anyway). It's a way to help elevate the stock and keep investors happy if results are less than stellar...and Apple has cash to burn. There are two ways companies can provide value to investors through their shares - pay dividends or do buybacks.

otterley 2y ago
Buybacks have tax advantages, which could be another reason Apple opted for it instead of a dividend. https://www.taxpolicycenter.org/sites/default/files/publication/165800/what_is_the_us_tax_advantage_of_stock_buybacks_over_dividends.pdf https://www.taxpolicycenter.org/sites/default/files/publicat...

brutus1213 2y ago

I think it boosts share price. Supposed to reduce tax burden vs. just giving investors dividends? With dividends, I think valuation only gets affected if it is done on a regular cadence (so old companies that are cash cows but don't really grow). IBM used to do this crap a lot but also promised a target dividend (back in the 2010s). IBM may have borrowed to pay dividends .. again some kind of financial engineering which may have made sense.

saulpw 2y ago

It undilutes the stock, indirectly raising the stock price. I've heard it's like paying a dividend, except taxed differently. So shareholders should be happy, and the executives at the company who are making this decision typically own a bunch of shares as well, so they should make out. If Apple thought they could spend $110B more efficiently, I guess they would. But it's difficult to deploy massive capital.

lowkey 2y ago

When a company reaches saturation in their core market and can no longer find new ways of investing free cash flow from the business into new markets that are likely to grow the value of the business greater than their cost of capital it has two options: 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.

pinkgolem 2y ago
>have run out of ideas for further growth That's not true, it's simply means they have more cash then they can invest. Not that they do not invest any more.
- jen20 2y ago
  They also pay a dividend: https://investor.apple.com/dividend-history/default.aspx https://investor.apple.com/dividend-history/default.aspx
- lowkey 2y ago
  Clarifying, they have run out of ideas for profitable growth net of the cost of capital.

alberth 2y ago

Earnings Per Share (EPS) 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.

paulddraper 2y ago

Selling shares trades dilution for cash. Buying shares trades cash for dilution. These are simply inverse operations. --- 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. --- 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. --- * 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).

sirspacey 2y ago

When you have an absolutely massive amount of cash, like Apple, there are near term and long term benefits to a buy back. 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.

lotsofpulp 2y ago
The answer is far simpler and less cynical. 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.
- SamReidHughes 2y ago
  Long term, buybacks aren't about supply/demand -- they increase a share's percentage ownership of the business.
  - tw8345 2y ago
    Primarily they are used to reward executives who have options and therefore get a disproportionate gain on the buyback.

erikson 2y ago

[dead]

SushiHippie 2y ago

Thanks for all the answers!