In 2024, FTSE 100 members announced £56.5bn of share buybacks. As this reduces the number of shares in issue, all other things being equal, this should increase earnings per share.
Not only does this help management teams achieve their performance bonuses but, supporters argue, it also increases the market-cap of a company.
However, critics claim that spending cash in this way simply leads to investors adjusting their valuations downwards. After all, the performance of the company hasn’t changed. They say — just like when a stock goes ex-dividend — its value should go down.
Ignoring the critics
But this hasn’t stopped Apple (NASDAQ:AAPL) spending $725bn on its own shares, since 2013. This has reduced the number in circulation by around 43%.
For the year ended 30 September 2024 (FY24), the tech giant reported earnings per share of $6.08. Without the share buybacks, it’d have been $3.47. So it could be argued that buying back its own shares has contributed 43% ($1.54trn) of its current market-cap.
A different approach
But instead of repurchasing stock, what would have been the impact of using the $725bn to expand through acquisition?
Based on their current market-caps, this would be enough to buy four of the FTSE 100’s biggest companies – AstraZeneca, HSBC, Shell and Rio Tinto. Imagine a transatlantic conglomerate selling iPhones, pharmaceuticals, banking services, oil and precious metals!
If Apple had bought these British companies, based on their latest results, they’d now be contributing $59.7bn to the group’s annual earnings. By coincidence, this is almost the same amount by which the tech giant’s profit increased between FY13 and FY24 ($56.7bn).
And based on a historical (FY24) price-to-earnings ratio of 38.8, this additional profit would have added $2.38trn to Apple’s market-cap!
This is over 50% more than the increase that’s apparently due to the share buybacks.
| Stock | Market cap ($bn) | 2024 earnings ($bn) |
|---|---|---|
| AstraZeneca | 234.4 | 7.0 |
| HSBC | 213.1 | 25.0 |
| Shell | 204.1 | 16.1 |
| Rio Tinto | 77.6 | 11.6 |
| Combined | 729.2 | 59.7 |
Looking ahead
I wonder if Apple’s going to reduce the amount it spends on buybacks over the next few years.
All of the ‘Magnificent 7’ are investing heavily in the artificial intelligence (AI) revolution. In my opinion, over the long term, diverting funds towards developing this technology is likely to be more beneficial than buying its own stock.
But it’s still not clear who’s going to win the AI race. And the company faces some other potential problems. President Trump’s tariffs could present significant supply chain challenges. And the mobile phone market is fiercely competitive. In particular, sales in China are slowing.
However, I see no reason why Apple shouldn’t continue to do well. It has a huge customer base with many loyal followers. It’s also able to earn impressive margins on its products.
Yes, there are many cheaper alternatives out there but, based on my personal experience, their performance is inferior compared to the ‘real thing’. Having suffered a cheap Chinese alternative for the past year or so, I recently switched back to an iPhone.
In my opinion, investors looking for a quality stock — that’s consistently delivered growth for over two decades now — could consider adding Apple stock to their long-term portfolios.
This post was originally published on Motley Fool
