After pulling back its buyback activity in the fourth quarter because of missing revenue guidance, Apple's (NASDAQ:AAPL) repurchases surged in the first quarter to $24 billion. The company continues to be opportunistic when timing its buybacks, taking advantage of depressed share prices in the first quarter and kicking off yet another accelerated share repurchase program. The board of directors also added $75 billion to Apple's share repurchase authorization.
In this segment, host Dylan Lewis talks Apple with Fool contributor Evan Niu. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on May 3, 2019.
Dylan Lewis: We can't talk about Apple without also briefly touching on the capital return program, one of the reasons investors love this company so much. This is the time of the year where we get an update on what's going on there, Evan. They didn't disappoint.
Evan Niu: Right. Always in the April/May timeframe every year, they give us this update. If you look back, last year in calendar 2018, they bought back about $71 billion worth of stock, which is just mind-boggling. That was more than double what they bought in 2017, which was $32 billion. This was all, of course, thanks to tax reform at the end of 2017. They had pulled back on the repurchase activity in the fourth quarter a little bit because they missed their revenue guidance so badly. But in the first quarter, they just bought back $24 billion, which is actually more than they bought back at any quarter last year. And the board has authorized another $75 billion on top of that for future share repurchases; and on top of that, they boosted their dividend by 5% to $0.77 per share. Same thing they've been doing every year. Every year, they want to get more back and they allocate most of that toward share repurchases over dividends because they think that the shares are still undervalued and compelling prices to try to retire their shares at.
Lewis: I'm inclined to agree. Coming down to either a dividend policy or a share buyback policy for a business that you know is generally going to be moving up and to the right, like Apple's, you want to take those shares off the books if you can. For me, I look at a company paying a dividend, and that's basically saying, "I can't do anything better with this money. I'm just going to hand it to you." I'd rather they work down the shares outstanding, boost that EPS just a little bit every single quarter, and wind up returning a little bit more value to people that way.
Niu: Yeah. Their broader capital structure, they have an idea where they want their capital structure to be, and that involves reducing a lot of this equity that's outstanding. At the same time, they appreciate that they have a lot of income investors, they do want to still give some of those dividends to the people that rely on it. But they have their goals set, and they've been very consistent with how they've been executing.
Lewis: Yeah. And for the time that they've been running this epic capital return program, it's almost always made sense for them to be buying back shares. You look back at an Apple chart, for the most part, they're almost always buying back shares at a lower valuation than they're currently trading. Particularly true if you go back a couple of years. I think that's what people need to remember with these buybacks. They're in a way reinvesting in themselves by taking all this stuff out from their shares outstanding, and you're benefiting from this because you own a larger portion of the earnings that are coming in. Hard to argue with that as an investor.
Niu: And they're definitely timing it, too. If you look at what was happening, the entire market pulled back in the fourth quarter quite a bit. Everything was selling off. So coming into the first quarter of 2019, a lot of stocks were just low. They obviously saw that and really ramped up their buying activity. Half of the $24 billion they bought back is part of an accelerated share repurchase program. They're definitely factoring in current market conditions when they make these decisions.
Lewis: Yeah. Before we taped today's show, I did a quick look, because I remember things being a little dire in the beginning of 2019 for Apple. Shares are up 48% since early January. Remarkable!
Niu: They were like $145 at the beginning of the year.
Lewis: Yeah! Absolutely remarkable for a company that size, outpacing the S&P's returns, and just a reminder of, this is what a capital return program can do for you, as an investor when you have a lot of cash to work with.