Apple’s Buyback Returns Billions to Long-Term Investors
In spirit, a stock repurchase program is pretty straightforward. The idea is that for whatever reason, a publicly traded company decides that the best way to spend its money is on buying back stock instead of using it for, well, anything else. The shares are purchased on the open market and absorbed by the company, effectively increasing the value of the remaining outstanding stock.
But the problem with share repurchases is that like with any other equity transaction, you can unwittingly make a bad trade. For example, Dell Inc. famously botched its buyback strategy and over the course of many years wasted a huge amount of cash by purchasing shares at a high premium. Dell spent nearly every penny it earned buying back stock, transferring the wealth of its business — which it owed either to shareholders or to reinvestment — to speculators, swing traders, or anyone else invested in the company simply to make a quick buck and not for the long haul. The nearly $40-billion fiasco has become the gold standard for what not to do with a buyback program.
So in April, when Apple Inc. (NASDAQ:AAPL) announced that its board of directors had increased the company’s share repurchase authorization from $10 billion to $60 billion, the market summoned the zeitgeist of the Dell fiasco and asked the obvious question: Is this really the best way for Apple to deploy its cash? The authorization created the single largest buyback program in history, so its failure could have a significant impact on the company. On the other hand, its success could increase shareholder value and shake out short-term speculators from the stock, leaving a more attractive core of long-term investors.