If you assume that Apple (NASDAQ: AAPL) will buy back another $20 billion in stock in the fourth quarter, since the company has bought back more than that on average every quarter this year, the iPhone maker will almost certainly end up buying back over $80 billion in 2018. With that kind of money, you could buy entire companies, including Tesla, Caterpillar, Sony, T-Mobile, or Goldman Sachs, among many others.
While there's no debate around the sheer size of Apple's repurchase program, we should really address how we discuss those buybacks.
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Consider a CNN article yesterday about Apple's announcement that it is building a $1 billion campus deep in the heart of Texas, correctly pointing out that the company is "giving far more to shareholders." Meanwhile, Senator Marco Rubio bemoaned in an op-ed at The Atlantic that so many companies are using savings from tax reform to repurchase shares instead of growing wages or otherwise investing in the U.S. economy, even though Rubio voted in favor of the Tax Cuts and Jobs Act and companies are expectedly just doing what's rationally in their best financial interests.
Despite the semantics around buybacks, particularly as it relates to repurchase programs as massive as Apple's, it's useful to remember some of the nitty-gritty details. When Apple buys back shares, it is purchasing shares from an investor that is selling those shares for whatever reason. That doesn't necessarily mean that the investor is even profiting from the transaction.
They could be. But they could also be selling at a loss. It all depends on what that investor's cost basis is. At a base technical level, yes, Apple is giving that cash back to an investor when it repurchases stock, but people often forget that the company is getting something of value in return: Apple stock. Those shares are ostensibly worth whatever Apple paid at that moment, at which point the company just retires the shares. Overthinking the dollar amount that Apple pays for its shares is tantamount to overplaying any other economic metric.
In a way, you could even say that Apple loses money on the deal, since it will never resell those shares for a profit – assuming that it never conducts a secondary offering, since realistically the richest company on Earth won't need to do any such thing in the foreseeable future. It's also not as if Apple pays itself dividends on treasury stock.
There are more Apple investors than you think
Repurchasing stock is a way for companies to adjust their capital structures, and there are all manner of reasons to do so. In Apple's case, the company simply has way more cash than it can use operationally, and repurchasing shares that it considers undervalued is a good way to spread out its profits over fewer shareholders (also known as earnings accretion) while pursuing its optimal capital allocation in order to fulfill its fiduciary duties to investors.
Keep in mind that vast numbers of Americans are also Apple investors, whether that ownership takes the form of owning stock directly or investing through a mutual fund, indexed ETF, or pension plan. Apple's market performance is tied to more retirement plans than you probably realize; the company helping its shareholders benefits plenty of average Americans.
At the same time, when you look at the money that Apple is investing in the economy, that money really does have direct, tangible effects. That $1 billion related to building the new Austin campus? It goes to construction companies and wages for the thousands of employees the tech titan plans on hiring. To be clear, Apple can be misleading at times when touting these figures for political purposes, but sometimes you have to cut through the noise to figure out what's really worth appreciating -- and what's not.
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Evan Niu, CFA owns shares of Apple and TSLA. The Motley Fool owns shares of and recommends Apple and TSLA. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends TMUS. The Motley Fool has a disclosure policy.