1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Robert Abbott
Robert Abbott
Articles (798)  | Author's Website |

Apple, Amazon and Share Buybacks

Share repurchases are a logical and effective way to help shareholders, if done right

Many corporations have sought government bailouts since the Covid-19 pandemic put the economy into reverse. In the cases of some companies, this prompted a backlash from critics, as these companies had recently spent millions or billions buying back their own (often overvalued) stock.

Warren Buffett (Trades, Portfolio) captured this mood during Berkshire Hathaway’s (NYSE:BRK.A)(NYSE:BRK.B) annual meeting of shareholders on May 2. Responding to a question about stock repurchases, he said it had become “very politically correct” to speak out against them. Buffett defended buybacks in general, saying they were a legitimate way to distribute cash to shareholders.

In fact, Buffett reported that Berkshire had bought back some of its own shares in the first quarter of this year. He explained that share buybacks are a good practice when stocks are selling for less than their intrinsic value and the company has an ample store of cash on hand.

Some of the firms that should not have been buying back their stocks were the airlines. According to AlphaSense, a market intelligence company, Delta (NYSE:DAL), American Airlines (NASDAQ:AAL) and Southwest (NYSE:LUV) all repurchased shares in March.

Among large-cap, publicly-traded corporations, 99 companies bought back shares in March. The biggest among them were three tech companies: Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL) and Microsoft MSFT). Combined, these companies bought back enough of their own shares to make up more than 44% of all buybacks for the month.

However, one big tech company did not buy back shares - Amazon.com (NASDAQ:AMZN). The company has not bought back any of its own shares since 2012, even though the board authorized up to $5 billion worth of repurchases in 2016. The company has also never issued dividends.

In this article, we will take a look at potential reasons why Amazon.com has not repurchased shares while Apple has repurchased a ton.

The chart below shows the amount of cash and cash equivalents each of the two companies had on hand at the end of their most recent quarters:

GuruFocus Apple Amazon cash holdings

As we can see, Amazon’s cash flow has been relatively stable, while Apple’s spiked recently. There are many potential ways to use that extra cash, including increasing capital expenditures, making acquisitions (CEO Tim Cook said in 2019 that Apple buys another company every two to three weeks), increase the dividend (which was 82 cents in the most recent quarter for an annual yield of just over 1%) and buying back shares.

Buying shares not only returns cash to shareholders, it also reduces the share count, increasing the earnings per share and driving up the share price. If there are not enough attractive acquisition or capex opportunities to consider, I believe this is typically the best way to return cash to shareholders.

Amazon, on the other hand, has taken the position that it never wants to mature. As CEO Jeff Bezos once put it, "Day 1 is where we always want to be and Day 2 is where we never want to be." Day 1 refers to growth and ever-increasing customer loyalty, while Day 2 refers to a mature phase when companies get comfortable and exchange high growth for returning more capital to shareholders.

As it keeps expanding its online marketplace and develops ancillary projects like iCloud, Amazon sees many opportunities to use its cash profitably. For nearly 25 years now, Amazon has delivered no dividends and few buybacks; it just keeps reinvesting the funds it generates. Long-term investors have profited massively, assuming they bought and held:

GuruFocus Amazon stock price chart

Amazon is a rarity in terms of its long-held status as a growth stock, even though it has consistently has had one of the largest market capitalizations for quite a few years.

By eschewing stock buybacks, Amazon has also avoided the risk that it might pay too much when repurchasing its shares. As Buffett and many others have argued, buying your own stock for more than its intrinsic value destroys wealth. 

In an article entitled, “Stock BuyBacks: A Lesson Not Learned,” fellow GuruFocus contributor Thomas Macpherson recommended that investors compare corporate stock buybacks with their own valuation processes. The rule for buybacks should be the same as for value investing: never pay too much. He wrote, “Unfortunately, all evidence would suggest that companies go on repurchasing binges as share prices reach new highs and cease purchases as share prices reach new lows.”

For Apple, at least some of its buybacks were at a discounted price, although whether this was below intrinsic value is a matter of viewpoint:

Apple stock price chart

Conclusion

Share buybacks at high valuations are not always exclusively beneficial to company executives and detrimental to shareholders, and I believe this holds true for Apple. Repurchases are a form of capital allocation, and like all types of capital allocation, the best use of it depends on the company.

However, buybacks at high valuations do have the potential to destroy wealth if they are conducted unwisely, such as for the purpose of granting massive paychecks to executives.

Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.

Read more here:

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


Rating: 0.0/5 (0 votes)

Comments

Please leave your comment:



Performances of the stocks mentioned by Robert Abbott


User Generated Screeners


pjmason14Momentum
pascal.van.garsseHigh FCF-M2
kosalmmuse6
kosalmmuseBest one1
DBrizanall 2019Feb26
kosalmmuseBest one
DBrizanall 2019Feb25
kosalmmuseNice
kosalmmusehan
MsDale*52-Week Low
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)