On Nov. 2, Apple (AAPL 0.06%) reported its fourth-quarter and full-year fiscal 2023 results. Despite beating top- and bottom-line expectations, the company saw its stock fall as much as 2.4% on Friday, although it finished the day down just 0.5%.
A lot of attention is focused on Apple's slowing revenue and low iPhone sales growth. But another concerning point is that its stock repurchases hit a three-year low in fiscal 2023.
Let's discuss the importance of Apple's buybacks, why they are an integral part of the long-term investment thesis, and if the company's slowing growth -- paired with lower buybacks -- is enough to justify selling the blue chip stock.
Image source: Getty Images.
$604 billion of buybacks
Apple bought back just $77.55 billion in stock in fiscal 2023 compared to $89.4 billion in fiscal 2022 and $86 billion in fiscal 2021. Here's what Apple's buybacks look like over the last 10 years.
AAPL stock buyback (annual) data by YCharts.
Although Apple bought back less stock than in the past couple of fiscal years, it still has one of the most impressive buyback programs out there. Over the last 10 years, it has bought back $604 billion worth of its stock. For context, that's about how much the entire company was worth 10 years ago. Or put another way, it's roughly the current value of Netflix and JPMorgan Chase combined.
Warren Buffett has long said that buybacks (for a good company) are better for long-term value generation than dividends, which is one of the core reasons Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) doesn't pay a dividend and instead uses extra cash to reinvest in the company or repurchase stock. So it's no wonder Berkshire's largest public equity holding is Apple, a company that shares Buffett's ideology.
The power of buybacks
Buybacks only work if a company grows in value over time, which is exactly what has happened with Apple, especially over the last seven years or so. If a stock doesn't grow in value, then buybacks are arguably an ineffective use of capital that would have been better spent improving the underlying business or paying dividends.
Apple has put on a master class on the effectiveness of buybacks. Over the last decade, it has reduced its outstanding-share count by a whopping 37.8%. Reducing outstanding shares boosts earnings per share (EPS) since there are fewer shares to go around. In other words, buybacks artificially grow EPS.
The best way to see the power of buybacks at work is to look at net income compared to EPS over time. In Apple's case, its net income has grown by 145.5% over the last 10 years and 75.5% over the last five years. But its diluted EPS has grown by 280.2% over the last 10 years and 106.4% over the last five years.
AAPL net income (annual) data by YCharts.
This massive buyback program has been an excellent use of capital because the stock has done so well. But it has also kept the company's valuation in check.
Apple earned $97 billion in fiscal 2023, or $6.13 in diluted EPS. But 10 years ago, it had 25.19 billion shares outstanding compared to just 15.55 billion today.
If the company hadn't bought back any stock over the last decade, its EPS would be just $3.85 in fiscal 2023 -- which would give Apple a 45.9 price-to-earnings (P/E) ratio instead of its current P/E of 28.8.
In sum, Apple's strategic buybacks, paired with its growing business, have allowed the company to grow in value without the stock becoming insanely overpriced. A 28.8 P/E is still a premium to the S&P 500's 24.6 P/E. But it is much more reasonable than a 45.9 P/E, which would be way too expensive for a company like Apple.
Apple is improving the quality of its business
Revenue in fiscal 2023 fell 1% year over year, but the growth of Apple's high-margin services business paints a rosy picture for investors.
Apple's business model is centered around expanding its product ecosystem. Traditionally, it has done this through existing product updates and new products. It has had a lot of success with its product innovations, including the iPhone, Mac, iPad, Air Pods, Apple Watch, and more.
But more recently, the company has taken its growth a step further by expanding services like Apple TV+, Apple Pay, Apple Podcasts, Apple Music, iCloud, and more. The services business is important because it provides a high-margin recurring revenue stream that doesn't rely on new product sales.
In fiscal 2023, services made up 22.2% of revenue but 35.7% of its gross profit, illustrating the segment's contribution to Apple's profitability.
What to watch
As mentioned, buybacks are especially effective if a business can grow in value over time. Given Apple's slowing growth and the fact that the stock is more expensive than in past years, buybacks simply aren't as attractive as they once were.
Management is making the right decision to pull back on stock repurchases. Ideally, Apple would allocate more capital toward improving the business and getting its growth back on track. Or maybe even making an acquisition to boost growth and diversify the business. But simply throwing money at buybacks when the core business has stalled isn't the best idea.
Apple has an excellent track record of doing what is best for its shareholders. And for that reason, investors should trust it to manage its capital allocation in a way that ensures the business is set up for long-term growth.
Management knows it can't solely rely on buybacks to boost EPS; it needs to grow earnings organically, too. All told, Apple's slowing buybacks aren't a reason to sell the stock. But it also doesn't look like a screaming buy right now, either.
