Apple Buybacks: Still a Bad Idea

Back in December, I wasn’t a fan of Apple buying back its stock. I’m still not a fan, despite the fact that Apple stock has dropped 40% since then and the fact that Arik Hesseldahl says that a buyback is a very good idea: "word of a buyback would probably give the stock price the kind of upward lift it needs," he says.

Um, needs? Why does Apple need a higher stock price? So that it can use its valuable stock as an acquisition currency? No, it can’t be that, since a large part of Hesseldahl’s argument is that Apple doesn’t really have any major acquisitions on the horizon. Is it for the sake of Apple’s most loyal shareholders? No: they’re generally happy with Apple’s long-term price appreciation. The main beneficiaries of a buyback would be the momentum traders who are exactly the kind of shareholders no company wants.

And I’m particularly unimpressed by this part of Hesseldahl’s piece:

I found 295 companies on the S&P 500-stock index that have announced stock buybacks since the start of 2003, and they averaged a gain of more than 66% over five years. Gainers outnumbered losers by nearly 5 to 1, with the gainers improving their stock prices by an average of more than 150%.

Wow, the 295 companies averaged a gain of 66% over five years? That’s exactly the gain that the S&P as a whole has had over the past five years! You’d almost think that buybacks made no difference at all!

As for the 150% figure, it seems extremely weird to me. Let’s say that you started with six companies, all of which were trading at $100. Five of them increased by 150% to $250 apiece, and the sixth went bankrupt with all stockholders wiped out. You started with $600, and you ended with $1,250 – for a minimum gain of 108% over five years. Now square that with the 66% figure.

Now, all that said, I don’t necessarily think that Apple should simply continue to accumulate cash for no particular reason except for the fact that it has historically paid no dividend. A modest dividend, tied to profits, makes perfect sense. A buyback, on the other hand, doesn’t.

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  1. Pingback: Apple’s sensible dividend | Felix Salmon

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