$573 BILLION BET: Apple has invested $573 billion into
this over the past 10 years, can you guess what it is? Maybe R&D? Well, Apple spends about $6 to $7
billion per quarter on R&D. So, while that adds up to about $250 billion over a 10 year period,
that’s less than half of this other investment. Maybe they spent it on acquisitions? Well,
Apple only has 2 acquisitions that even cross the billion dollar mark: Beats and Intel’s Smartphone
Modem Business. So, nowhere near $573 billion. Maybe they’ve been hoarding a crap ton of cash?
Well, Apple has actually be decreasing their cash reserves consistently from over $100 billion
down to just over $50 billion. Ok then, maybe it’s the total value of all of Apple’s assets?
Well, while Apple’s assets does tower at an impressive $350 billion, it still falls over $200
billion short of $573 billion. But then, if Apple didn’t spend this money on R&D, acquisitions,
cash reserves, or investments, where the hell did such a ginormous amount of money go? Well,
it turns out that Apple’s biggest bet over the past 10 years is actually stock buybacks.
That’s right, Apple has spent $573 billion over the past 10 years on stock buybacks.
For perspective, that’s enough money to buy a fortune 10 company cash. In 2nd place, we have
Microsoft who comes in at a measly $170 billion over the past 10 years or over $400 billion less.
It looks like disparity is only going to grow larger as Apple is simply doubling down. In fact,
nowadays, Apple is spending nearly a $100 billion on stock buybacks every single year.
Assuming that this continues to increase, Apple will spend over a trillion dollars on buybacks
over the next 10 years. This has sparked rumors regarding whether Apple is trying to go private.
But more importantly, it has raised concerns about whether this is healthy for the econonmy.
Instead of investing this money into creating new products, creating new jobs,
or even just storing it in cash or bonds where it can be lent out, Apple has decided to spend half
a trillion on inflating their stock price. So, here’s the story of how a once banned
practice became so popular and why companies are throwing trillions at buybacks every single year.
A BANNED PRACTICE: The reasoning behind why companies
love stock buybacks is not rocket science. By purchasing shares from the market and burning
them, companies are not only adding demand to the market but they’re also reducing supply. So,
thanks to basic supply and demand economics, this dynamic leads to stock prices going up. Aside
from boosting the stock price, buybacks also boost the benefits of being a shareholder. For example,
let’s say that Apple had a total of 100 shares of stock and that you owned 10 of them. This means
that you own 10% of the company, but what if Apple came in and eliminated 20 of these shares
by buying them back. Well, you still only own 10 shares, but since the total number of shares has
decreased to 80, you now own 12.5% of Apple. This means that you’ll now get 12.5% of the dividends,
12.5% of the voting power, and so on and so forth. So, it’s no wonder why companies and shareholders
love buybacks, but the impact of buybacks on the economy is not so bright. This is why stock
buybacks were banned for over 50 years up until 1981. You see, the idea of companies buying back
their own stock is by no means a new one. It’s only natural that once companies run
out of external places to invest, they turn to investing in themselves. But, ironically, the
roots of buybacks actually trace back to times of despair as opposed to times of prosperity to the
great depression. A lot of activists who are not a fan of buybacks like to claim that stock buybacks
are what led to the great depression in the first place but this is not true. The primary reasons
for the great depression were simply excessive speculation paired with excessive levels of debt.
But while buybacks didn’t cause the depression, the depression did cause buybacks and buybacks
only made the depression worse. For obvious reasons, investors became frantic when the Dow
Jones crashed 90% within a matter of 3 years. They demanded that executives put up strong quarterly
reports, increase dividends, and basically defy the economic situation. Understandably, this was
simply not possible for most companies given the economic landscape, but they were able to provide
investors some solace through buybacks. While this didn’t change the fact that most investors
were down a ridiculous amount, it did ensure that they could maximize the wealth that they did still
have. So, buybacks quickly became the go to way to pander to shareholders during the depths of the
great depression, but this was terrible for the economy. To escape the depression, America needed
corporations to invest in employees, factories, and R&D. But instead, companies were spending the
little money they did have on superficial avenues. This went on for a couple of years until the
Securities Act of 1933 and the Securities Exchange Act of 1934. This legislation wasn’t targetted at
stock buybacks specifically, in fact, it doesn’t even mention buybacks. Rather, it was designed to
prevent the depression from happening again by putting some checks and balances in place. One
of these checks and balances was that companies were not allowed to manipulate their own stock
price. Technically, there was no mention of stock buybacks, so that was more of a gray area, but no
company was brave enough to test the SEC. So, the practice of stock buybacks simply disppaeared into
oblivion. It would’ve been great if it stayed that way, but that obviously wasn’t the case.
BUYBACKS MAKE A COMEBACK: For the next few decades, no one
even mentioned the idea of stock buybacks. The entire world was in recovery mode both from the
Great Depression and WW2. America was also super focused on showing up the USSR with capitalism, so
allowing corporations to inefficiently spend their reserves on buybacks was out of the question. But,
as the stock market blew past its pre depression highs and America landed people on the moon,
congress became a lot more relaxed. They were no longer out to prove something, they had already
come out on top. So, now they were able to focus on personal gain, and what’s the easiest way to
make money as a politician? Well, the answer is the align yourself with the richest business
people and corporations around the world. This coincided with yet another economic disaster:
the inflation crisis of the 1970s. In the early 1970s, President Nixon would end the gold
standard meaning that US dollars were no longer backed by gold. This led to inflation spiraling
out of control, the stock market stagnating, and interest rates rising to a painful 19%. So, when
President Ronald Reagan stepped in and suggested doubling down on capitalism, people were more than
receptive. The logic was that capitalism is what saved America from the Great Depression and made
America into a world power. So, if we wanted to get back on track, we should let capitalism do
its magic. With that, President Reagan would enact a slew of pro capitlist legislation now
known as reagaonomics. This included things like slashing personal income tax from 70% down to 28%,
reducing corporate tax from 48% down to 34%, and easing regulation substantially. One of
these regulation reducing moves was Rule 10B-18 introduced by the SEC in 1982. As you may have
already guessed, this rule created a safe harbor for stock buybackas as long as companies abided by
4 stipulations. These stipulations governed when, where, and how companies were allowed to buyback
stock, but complying with these rules is actually completely voluntary. As we previously touched on,
the SEC never actually outright banned stock buybacks. So, companies could still try to push
the limits and buyback stock without following these stipulations. But, given that they’re
pretty easy stipulations to follow, no one has really pushed the boundaries. And with that,
stock buybacks were officially legal once again, but the practice didn’t catch on as quickly as you
might expect. You see, back in the 1980s, value investing was way more popular than it is today,
and one of the key attributes that value investors were looking for was a strong and
increasing dividends. So, whenever companies had extra cash lying around, they far preferred to
just pay out larger dividends than buyback stock. Not to mention, companies used to
have much more modest profit margins of 10 to 20%. So, they couldn’t meaningfully buy back a
substantial portion of the company anyway. But, all of this would change with the rise of tech.
APPLE BETS BIG:
Over time, the mentality of corporations and shareholders slowly shifted and this
is beautifully documented by statements from the Business Roundtable which is a coalition
of top CEOs. In 1981, this was the purpose of corporations as defined by these CEOs.
“Corporations have a responsibility, first of all,
to make available to the public quality goods and services at fair prices,
thereby earning a profit that attracts investment to continue and enhance the enterprise, provide
jobs, and build the economy.” But, by 1997, this was the purpose of corporations. The principal
objective of a business enterprise is to generate economic returns to its owners. If the CEO and the
directors are not focused on shareholder value, it may be less likely the corporation will realize
that value. This probably sounds familiar as this is how companies are run today. The sole purpose
of most companies and executives is to serve shareholders as best as possible. So, stock
buybacks started looking more and more favorable, but again, no company could casually afford to
spend tens if not hundreds of billions on stock buybacks until Apple or actually more specifically
the iPhone. Apple didn’t instantly turn to stock buybacks either though. For the first
5 years after the launch of the iPhone, they had plenty of expenses regarding scaling production,
marketing, and R&D. But, by 2013, Apple had achieved a pretty strong financial position
leading to their first stock buybacks. Apple was by no means shy either. They didn’t start off
with a modest $1 or $2 billion buyback. They went straight for a $10 billion stock buyback in 2012,
and less than 12 months later, they would announce a record breaking stock buyback of $60 billion.
And that was it, from then on out, Apple has been the undisputed king of stock buybacks
pouring in tens of billions into buybacks every single year. All of this brings up the question,
is Apple trying to go private and is that even possible? Well, with Apple’s market cap ballooning
to $2 to $3 trillion, it’s becoming less and less possible, but in the late 2010s, it was very much
possible. In fact, in 2017, Apple was on track to buyback 50% of itself by 2020. So, going private
was not out of reach per se but this was never part of the plan. You see, when Apple buys back
shares, they’re not putting these shares in some sort of company treasury. Rather, they’re burning
the shares and removing it from the supply. So, the shares that Apple is buying back are basically
being donated to all shareholders in proportion to their ownership. So, with that being said,
Apple is by no means going private despite buying up hundreds of billions of dollars worth of stock.
THE TIP OF THE ICEBERG:
People are often critical of stock buybacks, but the reality is that stock buybacks are just the
tip of the iceberg. The bigger underlying trend is that the entire purpose of corporations is
shifting. Originally, the purpose of corporations was to create value in the market place while
generating a respectable profit. But, nowadays, the sole purpose of corporations is to serve
shareholders no matter the cost. Stock buybacks are just one example of this trend but they’re
by no means the only issue. With that being said though, it doesn’t seem like this trend
will be changing anytime soon because that’s not in the executives’ best interest. You see,
as companies engage in stock buybacks, lobby for lower taxes, lobby for less regulation,
and maximize profits, shareholders are much more willing to pay executives more and more.
Back in 1965, the average CEO was paid 20 times the average worker.
Today, the average CEO is paid 399 times the average worker in the same company. So,
as long as this ratio keeps increasing, you can bet that Apple and every other company
will continue betting big on stock buybacks. Did you realize how much Apple has spent on
buybacks? Comment that down below. Also, drop a like if you think Apple makes way too much money.
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