Why Apple's Accelerated Share Buyback Is a Great Sign

Apple is very bullish on its future, and just put its money where its mouth is.

Feb 10, 2014 at 3:00PM

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.

Bob Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers