Why Apple's Accelerated Share Buyback Is a Great Sign

Wall Street may have been disappointed by Apple's  (NASDAQ: AAPL  )  most recent quarter, but the company's management team takes a different view. Shares of the technology giant fell hard after results were released, and it was revealed that Apple had accelerated its share repurchases. The Wall Street Journal reported that Apple bought back $14 billion of its own shares in the two weeks following its quarterly results, a pace far ahead of the $5 billion repurchased in the previous quarter.

Apple CEO Tim Cook stated that management wanted to be aggressive and opportunistic in buying back shares after the stock declined 8% on the day of the earnings announcement. Here's why the strategy was right on the money.

Wall Street was disappointed, but Apple sees things differently
It's abundantly clear that the market was disappointed over Apple's fiscal first-quarter results. While the underlying results themselves were impressive, Apple nonetheless failed to hit Wall Street expectations.

In all, Apple sold 51 million iPhones, compared to 47.8 million iPhones in the holiday period the year prior. That represents nearly 7% growth. The company also set a record for iPad sales, which reached 26 million in the first quarter. That was 13.5% year-over-year growth from the 22.9 million iPads sold in the same quarter of 2012.

Overall, Apple generated record quarterly revenue of $57.6 billion, which grew nearly 6% year-over-year. Diluted earnings per share rose 5%, which was important for Apple to demonstrate a return to profit growth in light of broad concerns over gross margins.

Disappointment in Apple needs context
Apple's results may have disappointed Wall Street, but its growth was notable in light of the struggles endured by its closest rival, Samsung (NASDAQOTH: SSNLF  ) . Samsung's mobile device segment saw operating profit fall by 18% in the most recent quarter. The company posted a drop in quarterly profit, the first such quarterly decline in two years. Clouding things further was the fact that management stated it would be difficult to grow profit in the current quarter.

While the market demonstrated its disappointment in Apple by selling off shares after the earnings report, Apple management reiterated its own optimism through the accelerated buyback. The company believes it's got a bright future, which management reiterated by buying back so much stock in such a short time. This optimism is entirely believable, since it's likely we'll see some new products in 2014.

In the coming year, we could see a new iPhone, the much-anticipated iWatch, or some kind of Apple television. Whatever the future has in store, there are plenty of new revenue streams for Apple to tap into. Also, that's not even including the potential of the newly formed partnership with China Mobile (NYSE: CHL  ) . That will now allow Apple's devices to be sold to China Mobile's 750 million customers, not to mention the synergy possibilities once all those customers enter the Apple ecosystem.

Apple's strategy: buy low
Often, companies buy back their own stock at precisely the wrong time. In other words, companies tend to buy back shares only after the price has hit multi-year or all-time highs. Buybacks soared in 2006 and 2007, then dried up in 2008 and 2009 during the heart of the recession. This stands to reason, of course, since companies typically have a lot of cash to fund these buybacks during a strong economy.

However, for investors who follow the tried and true "buy-low, sell-high" methodology, the same concept should be applied to corporate share repurchases. It makes perfect sense that Apple would accelerate a buyback when its shares fall, since that will provide the most accretive benefit to shareholders. While outright market timing is foolish, it seems like a shrewd move for Apple to purchase more shares near $500 per share, rather than wait for a significantly higher share price.

The Foolish takeaway
Apple is clearly confident in its future product pipeline, which could include a new iPhone, a television, or the iWatch. Management proved how confident it is in the company by buying $14 billion of its own shares after releasing its most recent quarterly report. This, along with a meaningful new product release this year, may be just the trick to produce strong earnings growth in 2014 and significantly unlock shareholder value.

A tech stock that's worth it
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2832424, ~/Articles/ArticleHandler.aspx, 12/18/2014 6:31:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement