Yesterday Apple announced better-than-expected second quarter results, with revenue and net income coming in above expectations.
However, what stole the investment spotlight was the announcement of the biggest ever share buyback in US history – coming in at $110bn.
The new buyback smashed Apple’s previous $100bn buyback in 2018 and is more than 20% higher than its $90bn buyback last year. This means one of the world’s biggest companies now holds six spots in the top 10 of biggest ever share buybacks in the US.
But what do buybacks mean for investors, and why do so many companies do them?
This article isn't personal advice. If you’re not sure if an investment is right for you, ask for advice. Investments and any income they give you can fall as well as rise in value, so you could get back less than you invest. Past performance is not a guide to the future.
What are share buybacks?
A share buyback is when a company uses excess cash to buy its own shares, which typically reduces the number of shares outstanding.
How do buybacks affect investors?
When companies buy back their own shares, you’ll own the same number of shares as before. But because there are now fewer shares in existence, it can push up the value of your shares.
You’ll basically have a bigger slice of the same pie.
What does it mean?
Share buybacks normally take place when the company’s management thinks the shares are undervalued.
These executives are arguably best placed to know the value of their company’s own shares.
Buying back shares when they’re selling for less than their true value is like buying a pound for 90 pence. Of course, identifying the true value is never easy, but in theory it’s a great way to add value to the company. And when that happens, it’s shareholders that reap the benefits.
Well-executed share buybacks can also save shareholders having to pick the right time to reinvest dividend payments. But there’s always a danger management could buy back shares at the wrong time.
It’s also important that buybacks aren’t made just to prop up stock prices or boost metrics which are linked to management’s bonuses. Buybacks should only be made because they offer attractive returns as investments in their own right.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
If you’re looking for what this record share buyback could mean for Apple shares, you can read our latest view using the link below.