Before the corporate tax law changes, Apple Inc. (AAPL, Financial) was sitting on more than $250 billion in accumulated earnings from its foreign operations. Once the reduced rates became effective, Apple repatriated this staggering sum of cash back to the U.S., where it has been used to engage in a massive stock buyback program. CEO Tim Cook, long a critic of the 35% tax on foreign earnings, promised that were taxes lowered, he would put the money to good use in the U.S.
Once the tax law reductions were effective, Cook was true to his word. He announced immediately that the company would commence repurchasing shares at a rapid clip and increase its quarterly dividend. The company repurchased approximately 137 million shares during its fiscal second quarter ending March 31. This represents a pace more than triple that of the average level of buybacks over the previous eight consecutive periods. This sum expended by Apple is in addition to the $275 billion returned to shareholders since 2012, as a response to pressure to reinstate its cash dividend that had been suspended since 1995.
The accelerated repurchase activity will continue. Apple has announced it intends to complete its planned buyback of $10 billion before the end of its June quarter. This level of buyback activity could amount to approximately 6% of the company's total share volume over the next four quarters. The target date for the completion of the share repurchase is well ahead of the previously announced March 2019 deadline.
One of the factors that may be fueling the accelerated pace of Apple’s aggressive share repurchase plans is iPhone sales were down 20% recently and, traditionally, the summer months are slow sales period for the company’s number one revenue generator.
Normally, all else being equal, share repurchases have the effect of lowering overall market capitalization, as there are fewer outstanding shares. In Apple’s case, however, the price of the stock has doubled since 2012. Thus, even though there are fewer shares outstanding, the market capitalization from previous share appreciation has made it possible for the company to reach the coveted $1 trillion market capitalization benchmark.
Apple’s stock has responded favorably to the buyback plan. When the company announced on May 3 that it would embark on an unprecedented $100 billion repurchase agenda, its shares climbed 4.4% the next day and 13% for that week — the largest one-week percentage gain since 2011.
Apple is but one of the many large-cap corporations that have engaged in high-volume buybacks since shortly after the financial crisis of 2008. It was an auspicious time then for purchasing their own shares, which were depressed after the market crashed. Buybacks between 2008 and 2015 exceeded $572 billion and helped fuel the decade-long bull market.
It is likely that the S&P 500 would have performed far worse than its modest gains year to date if it weren’t for the massive buybacks implemented by many large companies after the tax law changes became effective.
Disclosure: I have no positions in any of the securities referenced in this article.
