On Thursday, Apple (NASDAQ:AAPL) sparked a mini-controversy with its Q2 2024 earnings report. The phone company announced the largest share buyback program in the history of the US stock market, worth $110 billion. This surpassed Apple’s own record of $100 billion buyback program announced in 2018.
Only Chevron Corporation (NYSE:CVX) came close second at $75 billion in January 2023.
But for those who have read Apple’s deeper coverage in March, this was not surprising. The company is facing stiff competition from several fronts. South Korean Samsung (KS:005930) and Chinese Huawei and Xiaomi (OTC:XIACF) arguably pose a better value for the money for most consumers.
Although Apple branched out beyond the smartphone market, it still comprises the bulk of the revenue. For Q2 2024, Apple tracked $90.8 billion net sales, a 4% decline year-over-year. Of those, the iPhone segment was responsible for $45.9 billion, or 50% of Apple’s revenue.
Moreover, Apple priced its Vision Pro entry in the AR/VR market as a luxury item, as if Meta’s Oculus Quest doesn’t exist or suffers from decades of failures to launch. Compounded with rising costs of living via inflationary pressure, Apple’s focus on a closed, premium ecosystem doesn’t bode well for growth.
However, is a record-breaking share repurchase program the right strategy to boost AAPL value? Wouldn’t that transform Apple from a growth Big Tech stock into a value stock?
It turns out, this financial novelty has its root in inflation, mirroring today’s macroeconomic landscape.
Stock Buybacks: Market Manipulation or Value Booster Driven by Macro?
Up until the early 1980s, share repurchase programs were illegal. After all, by repurchasing its own shares on the open market, the company’s insiders would have an advantage that can be construed as market manipulation.
Nonetheless, during that period of rampant inflation, the Securities and Exchange Commission (SEC) deemed it as another mechanism to return shareholder value beyond dividends. By passing Rule 10b-18 in 1982, the SEC made it a valid move to combat high inflation. This way, instead of engaging in the expense of expansion, companies can tweak their share supply so the stock price can keep up with inflation.
As the inflation rate is becoming sticky and crushing meme stocks, Goldman Sachs (NYSE:GS) reported a six-year high in stock buybacks and mergers worth $625 billion this year, as of the end of March. GS analysts forecast the continuation of this trend, with S&P 500 firms ramping up share repurchases by 13% by the end of the year to $934 billion and then crossing the $1 trillion milestone in 2025.
This trend is the opposite of 2023, when there was a 13% decline in corporate buybacks. However, this was the year of recessionary concerns wherein recession was seen as the ultimate remedy for inflation at the cost of unemployment.
Limits to Stock Buybacks
By artificially tampering with shares’ supply, much like central banks do with fiat currencies, companies create a false sense of stock demand. In the irrational waters of the stock market, this has great potential for stock overvaluation. In turn, this creates a pull-the-rug potential.
Moreover, such large expenditures to boost stock value are displacing resources for growth. Instead of investing in employees or research and development, the purpose of the company shifts to financialization.
At a time when Apple faces antitrust charges, the company not only increased share repurchases but increased dividend payouts by 4%. Early on, in January 2019, Apple CEO Tim Cook made it clear that the company’s bottom line rests on its closed ecosystem that generates high brand loyalty.
“…my honest opinion is that there is a culture of innovation in Apple and that culture of innovation combined with these incredible, loyal customers, happy customers, this ecosystem, this virtuous ecosystem, is something that is probably underappreciated.”
Tim Cook in Mad Money with Jim Cramer interview.
If the latest antitrust lawsuit were to break those ecosystem walls, such as imposing “extraordinary costs on developers, businesses, and consumers”, Apple’s value proposition would likely lag behind buyback efforts.
In a way, just as the USG conducts record-breaking interest payments to pay for its money supply tampering, instead of building great projects, Apple may find itself in a similar bind.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
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