So far this year, buyback announcements from all U. S publicly traded companies totaled just over $500 billion…. For all of last year, companies announced $685 billion in buybacks up from $670 billion in 2016.”
The recent activity follows changes to the tax law that made buybacks more attractive for companies.”
This is from Gretchen Morgenson and Tom McGinty at the Wall Street Journal.
Thank you Mr. Trump.
And, then there is Apple Inc. (NASDAQ:AAPL). “Apple has been buying back its own stock at a furious clip since last year’s tax-overhaul package freed up more than $250 billion that the company had accumulated in its offshore bank accounts.”
Thank you, Mr. Trump.
Apple repurchased about 137 million shares on the open market during its fiscal second quarter that ended March 31, which is more than triple the pace of buybacks averaged over the previous eight periods.”
The company said on its latest earnings call that it intends to complete the $10 billion remaining on its current buyback plan before the end of the June quarter.”
It also announced a new $100 billion buyback that…would be executed ‘efficiently and at a fast pace.’”
Apple’s “number of shares outstanding has fallen by 25 percent on a split-adjusted basis since the company began its first buyback plan in September 2012…. But the stock price has doubled since, bringing the company’s total market value up by 49percent.”
Is Apple pushing to become the first company to reach a $1 trillion market value?
I don’t believe that this is really the goal of Apple management, although, having the record won’t be bad.
No, I think that Apple has a better, longer-term plan.
In previous posts, I have argued that Apple presents us with a picture of where the modern corporation is going. Financial engineering is just as much a part of Apple’s strategic planning as is the production of the next generation of iPhones or whatever.
Financial engineering is an integral part of the modern corporations' game plan because one of the major “products” of the modern corporation is cash. Information technology companies, like Apple, produce goods with a low marginal cost, which means that it can benefit greatly from increasing the scale of its business as well as increasing the scope of its business.
Because of this, “modern corporations” like Apple generate lots and lots of cash.
Consequently, finance must be an integral part of the operations of a “modern corporation.” If a company, like Apple, does not manage its “cash” well, then it is letting down its shareholders. Excellent financial engineering MUST be a part of the sustainable corporate advantage created by these companies. And, this directly spills into other areas of finance like mergers and acquisitions, which is such a big part of the future of the “modern corporation.”
Apparently, however, not all companies going the stock buyback route engage in buying back their stock for the benefit of its shareholders.
The general thrust of the Wall Street Journal article cited above and produced by Ms. Morgenson and Mr. McGinty is that “Corporate insiders are personally capitalizing on the recent boom in buyback announcements….”
Taking advantage of price bumps that often accompany share-repurchase announcements , company executives have been selling significantly more of their stock immediately after the news than they do beforehand.”
This information is coming from Robert J. Jackson, Jr., a commissioner at the Securities and Exchange Commission. Mr. Jackson is looking for a change in the rules pertaining to stock buybacks, something that has not been done for some time.
Mr. Jackson believes that executives who sell into buybacks are benefiting at the expense of shareholders. He contends, “If an executive believes a buyback is the right thing for the long term, they should put their money where their mouth is and keep their stockholdings.”
The point is, for the investor, one must be cognizant of what is happening because of a company’s stock buyback program. In a study completed by Mr. Jackson, he found “At 32 percent of the companies (he studied) at least one insider sold in the first 10 days after the buyback announcement.”
An investor must understand just what is going on within the decision that a company makes to buy back its own stock. Stock buybacks can be very beneficial. The shareholder wants to understand who is benefiting the most when a company buys back its shares.
Apparently, corporate leaders believe that 2018 is a good year to buy back company stock. But, what does this mean for the economy?
Stock buybacks, like in the Apple case, result in higher stock prices, higher price-earnings ratios, which contribute a lot to pricing advantages for a corporation that is looking forward to expanding through the merger and acquisition route.
However, mergers and acquisitions do not lead to greater investments in physical capital and increases in employment. Mergers and acquisitions generally lead to combinations, consolidations, and rationalizing the use of the existing employees. So, a boom in stock buybacks does not do a lot to further stimulate economic growth.
Still, good management of companies, which includes top quality financial management, benefits the economy, benefits shareholders, and builds up the positive reputations of corporate management.
In this respect, I believe that the management of Apple has been doing an excellent job in leading this company for the long run.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.