Time For Apple To Change Its Buyback Playbook – Buyback Wednesdays

Last week Apple (AAPL) authorized an additional stock repurchase plan of $90 billion. This is the third year in a row the company had added $90 billion to its buyback program. This buyback represents around 3.4% of its market cap at announcement and brings its expenditure on stock repurchases to over half a trillion dollars in the past decade. In addition, Apple increased its quarterly dividend by 4% to 24 cents per share.

In fiscal Q2,2023, Apple spent $19.1 billion on share repurchases. The declining shares outstanding graph below clearly indicates that the company has been an uber cannibal by following through on its buyback announcements and repurchasing shares. Apple has retired about 16% of its outstanding shares over a five-year period and has spent a total of $573 billion on buybacks in the past decade.

The quarterly dividend increase marks the iPhone maker’s eleventh consecutive year of dividend increases since it started paying dividends in 2012. With a low dividend yield of 0.6%, the company is clearly prioritizing share buybacks over dividends to return capital to shareholders. Apple is paying out around 16% of its earnings in dividends.

Warren Buffet, CEO of Berkshire Hathaway said recently in an annual meeting that “the iPhone maker is a better company than any firm in the conglomerate’s vast portfolio”. Berkshire owns about 5.8% of Apple, a stake worth more than $150 billion. The technology titan represents a big chunk of Berkshire’s $700 billion market capitalization.

At a valuation of $2.7 trillion, or $171.77 per share, Apple is not very far from its all-time high of just over $180, becoming the first company worth $3 trillion. It has crossed the $170 mark four times in the last 2 years.

Is This The Right Time To Buyback Shares?

The timing of share repurchases is very important for a buyback to be successful. More often than not, companies make the mistake of buying back their shares at cyclical peaks when the stock appears cheap and the company is flush with cash. In other instances they continue to buy shares irrespective of the valuation of the company to offset dilution from stock-based compensation or acquisitions. A third group repurchases shares because the strategy has worked in the past and it boosts EPS numbers.

Apple’s shares are currently valued at a forward P/E of 29, which is approximately 18% above Apple’s 5-year average P/E ratio. The stock is nowhere near the single digit EV/EBITDA multiple when Apple ramped up its repurchase activity. Back then, investors were skeptical about Apple’s ability to continue performing following the passing of Steve Jobs and Tim Cook was not as widely celebrated for his operating prowess as he is now.

While the company’s services business has grown and the Apple Watch has become an unexpected hit, we are yet to see the large screen Apple TV or an Apple Car. I would even settle for a foldable phone in a slim form factor that can double my reading surface area.

Fiscal Q2 2023 Results:

Apple reported middling results, with both earnings and revenues coming in above previously lowered estimates for the second fiscal quarter of 2023.

• Apple’s Q2 revenues were $94.9 billion which beat estimates by $2 billion. But it represents a 3% year-over-year decline. Management attributed this beat to strong iPhone sales which grew by 1.3% to $51.33 billion compared to a -13% decline in the global smartphone market. This exceeded expectations of $49 billion in iPhone sales.
• Apple’s Mac and iPad sales plunged -31% y/y and -13% y/y respectively in Q2 due to lower consumer spending.
• Apple’s Wearables segment held up quite well because of the strong performance of the Apple Watch but it still declined by 1% y/y.
• Apple’s services revenue grew to $20.9 billion (up 5.5% y/y), with over 975 million active subscriptions across its various digital services in the quarter.
• The company gross margin was 44.3%, up 130 basis points from last quarter, driven by cost savings measures adopted by Apple.
• Net profit also declined to $24.1 billion, again a 3% year-on-year decrease.
• Diluted earnings per share were $1.52, unchanged compared to last year, and the company generated very strong operating cash flow of $28.6 billion.

Apple ended the quarter with over $55.82 billion in cash and short-term investments. It repaid $2.3 billion in maturing debt, leaving it with net debt of $51.73 billion. The net debt does not take capital leases or $110.46 billion in non-current marketable securities into account.

The Bottom Line:

Apple has established itself as a premium brand with a strong brand image. The decline in sales of the first two fiscal quarters of 2023 should be a canary in the coal mine moment for investors. It is possible that future revenue and earnings might be impacted as the economy heads for a hard landing. In the short term, there is a risk that the company’s margins might take a hit from higher prices. Seventeen analysts revised their earnings estimates downward for Apple over the last 90 days. While the company beat earnings expectations, those expectations were set low to begin with.

Apple’s share repurchase playbook worked for several years but it just might be time to retire the playbook just like it has been retiring its shares. At the current valuation, the company might be better off making some bold bets with its capital, whether it is through internal moonshot projects or acquisitions, instead of relying heavily on financial engineering. Considering the rising cost of debt, paying down some of the debt on its balance sheet might also work better than additional buybacks.

Welcome to edition 58 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

As companies have started reporting their first-quarter earnings, buyback activity saw a significant increase with 32 announcements compared to 18 in the prior week. This trend is likely to continue for a few more weeks.

Top 5 Stock Buyback Announcements 

1. LSB Industries, Inc. (LXU): $9.55

 On May 8, 2023, the Board of Directors of this chemical products manufacturer authorized a new $150 million share repurchase program, equal to around 20.6% of its market cap at announcement.

2. CNO Financial Group, Inc.  (CNO): $21.34

On May 5, 2023, the Board of Directors of this insurance company, authorized an additional share repurchase of $500 million of the company’s Class A common stock, equal to 20.4% of its market cap at announcement.

3. WillScot Mobile Mini Holdings Corp. (WSC): $44.70

On May 4, 2023, the Board of Directors of this modular space and portable storage solutions provider authorized a new $1 billion share repurchase program of the company’s Class A common stock, representing around 11.8% of its market cap at announcement.

4. Orion Engineered Carbons S.A. (OEC): $23.4

On May 5, 2023, the Board of Directors of this carbon black products provider approved a new share repurchase program to purchase 6.9 million shares, equal to around 11.5% of its market cap at announcement.

5. ArcelorMittal   (MT): $27.57

On May 4, 2023, the Board of Directors of this steel manufacturer authorized a new share repurchase program to purchase 85 million shares, equal to 10.8% of its market cap at announcement.

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