Apple's record $110bn buyback

Apple has authorized a $110 billion share buyback, the largest in American corporate history, alongside a modest dividend increase. The authorization alone is bigger than the entire market value of eighty per cent of the companies in the S&P 500.

A quarter that needed help

The announcement came with results for the March quarter that were weak by Apple's standards. Revenue fell by about 4 per cent from a year earlier, iPhone sales dropped by roughly a tenth and sales in Greater China declined again. The dividend rose by 4 per cent, to 25 cents a share. The shares still jumped about 6 per cent the next day, because the capital return and a cautiously upbeat outlook for the June quarter outweighed the numbers already booked.

The record being broken was Apple's own. It authorized $100 billion of repurchases in 2018, after the Tax Cuts and Jobs Act allowed it to bring home cash held abroad at a reduced rate, and it has approved $90 billion a year more recently. Since it began buying back stock in 2012, Apple has cut its share count by more than a third, a larger reduction than almost any other large company has attempted.

Buying back growth

The buyback was a well-timed distraction from slowing iPhone sales and regulatory trouble in China. Apple generates enormous cash from its operations, and by using it to retire shares at scale, it can deliver steady growth in earnings per share even when revenue stalls. For a mature technology giant, financial engineering is the most dependable tool left in the box.

The pressure in China is both commercial and political. Huawei's return to high-end smartphones last August, with a handset built around a domestically made advanced chip, gave Chinese buyers a patriotic alternative. Reports that some government agencies and state firms had told staff not to use iPhones at work added to the damage. Elsewhere, the European Commission fined Apple about €1.8 billion in March over its treatment of rival music-streaming services, and the Justice Department filed an antitrust suit against it the same month.

Paying up for its own shares

The mechanics are straightforward. If Apple retires 3 per cent of its shares in a year, earnings per share rise by roughly 3 per cent even if net income is flat. That is why buybacks have supplied a large share of the company's per-share growth in years when revenue barely moved. The Inflation Reduction Act now levies a 1 per cent excise tax on net repurchases, a small cost that has not changed the calculation.

What has changed is the price. When Apple borrowed cheaply in the 2010s to fund repurchases, its shares traded on modest multiples and the company was effectively swapping expensive equity for low-cost debt. Today the ten-year Treasury yields around 4.5 per cent, and Apple's shares trade at a multiple of earnings that implies an earnings yield below that. A company that buys its own stock on those terms is paying a premium for its own future growth, which makes the growth all the more necessary.

The case for handing back cash

The defence is that Apple has little better to do with the money. Its capital spending needs are modest relative to its cash generation, it rarely makes large acquisitions, and its stated aim is to move over time towards holding no net cash. Returning surplus funds is more disciplined than hoarding them or buying growth at inflated prices, as other technology companies have done. On that view the buyback is sound housekeeping, and the timing is irrelevant.

The argument is strong as far as it goes. It does not answer the question investors are really asking, which is where the next leg of revenue growth comes from. Apple dropped its car project in February, and the Vision Pro headset, launched the same month, is too expensive to move the needle soon. The services business, from the App Store to payments, grows steadily but is the part most exposed to the antitrust cases on both sides of the Atlantic.

A precedent from Armonk

There is a cautionary example of how this can end. IBM spent heavily on buybacks through the 2000s and early 2010s and set itself targets for earnings per share that repurchases helped it meet. Revenue, meanwhile, fell for 22 consecutive quarters from 2012, and the shares went sideways for most of a decade as investors stopped paying for engineered growth. Apple is in a far stronger position, with a loyal customer base and a services arm IBM never had, but the lesson is that markets eventually look through the share count to the top line.

Who benefits and who waits

Short-term shareholders are the clearest winners, since a standing buyer supports the price and the earnings-per-share arithmetic flatters results. Holders of Apple's bonds face a marginally more leveraged balance sheet over time, though from a very strong starting point. Longer-term investors are the ones being asked to wait, and some large holders appear less patient than before: Berkshire Hathaway, one of its largest shareholders, disclosed this month that it had trimmed its stake in the first quarter.

What would change the view

The next test comes on 10 June, when Apple opens its annual developer conference and is expected to set out its plans for generative AI across the iPhone and its other devices. A convincing story there could revive expectations of an upgrade cycle, which is the only thing that would restore meaningful revenue growth. After that, the September quarter's iPhone launch and any sign of stabilisation in China will matter far more than the pace of repurchases.

Apple can probably keep earnings per share rising for a few more years by shrinking its share count. The buyback will not make anyone buy more iPhones, though, and investors will eventually want to see revenue grow again. If June's AI announcements fail to spark an upgrade cycle by the end of the year, the shares will struggle to hold their premium multiple regardless of how many are retired.