Companies generate revenue by selling something. The soundest businesses pay off their bills, invest in capital projects, and end up with free cash flow (FCF).
One way to use this FCF is for management teams to repurchase shares of stock. This is generally viewed as a value-accretive endeavor as fewer shares means shareholders own a bigger piece of the pie. So investors might want to pay attention to companies engaging in this activity.
There's one tech titan that has long been a leader when it comes to share buybacks, repurchasing a jaw-dropping $695 billion of stock in the past decade. Here's what this means for investors in the company: Apple (AAPL 0.16%).
Apple knows how to make money
At a market cap of $3.1 trillion, Apple is the world's most valuable enterprise. The business has been wildly successful.
Apple sells some of the most in-demand hardware products. The company says there are nearly 2.4 billion active Apple devices in use around the globe, none more important than the iPhone. This single product represented 56% of the company's revenue in the first quarter of its fiscal 2025, the quarter ended Dec. 18, 2024.
The business is also finding tremendous success with its services division. The segment grew sales 14% in the latest fiscal quarter. The digital offerings are great for the company as they carry a stellar 75% gross margin.
All this supports the fact that Apple is a money-making machine. In fiscal 2024, it reported $391 billion in total revenue. It notched $109 billion of that as FCF. This is money that was left over after the leadership team invested in growth initiatives. It's available to be spent on acquisitions, dividends, and buybacks.
Buybacks are the focal point at Apple, whose dividend yields under 1%. In the last quarter, the company spent $24 billion on repurchases, continuing a long-running trend. In the past 12 months, Apple's diluted outstanding share count has been reduced by almost 3%.
NASDAQ: AAPL
Key Data Points
Sizing up share buybacks
At a high level, Apple's sizable stock buybacks showcase just how financially strong this business is. From a numbers perspective, existing shareholders end up owning a larger chunk of the company; fewer shares can raise earnings per share (EPS). Buybacks can also instill confidence among the investment community. Perhaps the buybacks have contributed to Apple stock's impressive 600% total return since April 2015.
However, this doesn't automatically mean Apple shares present a smart buying opportunity today. Ideally, investors want management teams to engage in share buybacks when the stock is cheap, as it indicates sound capital allocation skills to direct excess cash to its best use. Executives should have a firm grasp on the true intrinsic value of their company and can buy back shares below this estimate to benefit all investors.
In Apple's case, this is hardly true. In the past 12 months, the stock traded at an average price-to-earnings ratio of 34.8. For a company whose EPS declined in fiscal 2024, this valuation looks stretched.
But CEO Tim Cook and his team don't have much choice. Apple's best option would be to reinvest more capital directly into the business, maybe to come up with growth avenues like new product or service launches. Instead of repurchasing shares, money would be used to strengthen Apple's competitive position, with the potential to increase revenue and profit years down the line.
The issue, though, is that Apple faces limited opportunities to do just this. It's already so ubiquitous and massive that it's extremely difficult to move the needle. The company was reportedly working on an electric vehicle, but plans were scratched. If this had worked out, it would have given Apple a huge end market to enter.
But as things stand today, it appears that share buybacks will remain a top priority for Apple. This is the case even with the stock's valuation stretched.
