AAPL Stock Buyback: A Timely $58 Billion Infusion for Apple Inc.

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Apple Inc. (AAPL) reported earnings a few days ago, and the market’s reaction was pretty darn ugly. AAPL stock fell 6.2% on Wednesday after missing on earnings per share and revenue, and issuing bleak fiscal Q3 guidance.

AAPL Stock Buyback: A Timely $58 Billion Infusion for Apple Inc.

Thursday was a little kinder to shares of the iPhone maker, but Apple stock still lost another 3.1%, with most of the losses coming late in the day after famed investor Carl Icahn said on CNBC that he had totally disposed of his multibillion-dollar AAPL stock position.

The trend continued on Friday, with Apple stock losing another 1.1%.

Believe it or not, this short-term pain could actually end up being a good thing for Apple shareholders … I know that sounds far-fetched, but hear me out.

Management to Buy AAPL Stock Back Near Lows

With shares now trading a bit above $93 a pop, AAPL is just a hair above its 52-week low of $92/share. Here’s why that’s arguably a good thing: According to Apple’s Q2 report, the company is embarking on an enhanced buyback program that started on Friday.

Buying back stock can have both short-term and long-term benefits for shareholders. In the short term, it provides more excess demand for AAPL stock, which will have a net positive effect on the stock price. In the long term, it reduces the number of shares outstanding, giving each current shareholder a greater stake of ownership in the company.

And let’s say Apple posts the exact same net income in Q2 of 2017 that it just did in Q2 of 2016 … EPS will actually be higher a year from now, because there will be less shares to spread the earnings around to.

Earlier this week, Apple increased its repurchase authorization by $35 billion, taking it from $140 billion to $175 billion. After spending $7 billion on share buybacks last quarter, the company expects to spend $58 billion over the next two years buying back AAPL stock. That’s a slightly increased pace, averaging out to $7.25 billion in stock repurchases per quarter.

Of course, there’s a flipside to buybacks: If you buy back shares at the wrong time, you run the same risk that any AAPL investor does. Namely, the stock could fall a lot further and you could look like an idiot.

Frankly, that’s where the company is right now.

Last quarter, the $7 billion in AAPL stock buybacks was done at an average price of $97.54, and over the previous five quarters the company bought back $33 billion in stock at prices between $109 and $128. Not the greatest move.

Conversely, it rushed to spend $18 billion on stock buybacks in early 2014 when the market was down on AAPL and shares were trading around $75 a pop.

Companies can get too obsessed with share buybacks as a capital return tool, of course, and a number of prominent dividend stocks like Lowe’s Companies, Inc. (LOW), Time Warner Inc (TWX), Home Depot Inc (HD), Caterpillar Inc. (CAT) and Kimberly-Clark Corp (KMB) have been spending far more on share buybacks and dividends than they make in earnings.

In Apple’s case, however, I think now’s as good a time as ever to ramp up spending on share buybacks. Given its overwhelming size and slowing sales momentum, the bulk of shareholder gains in the future, I think, will be driven by AAPL stock buybacks and dividend payments.

I could be wrong, though, and if you’re someone who thinks AAPL stock is in for a rally later this year as massive demand for the iPhone 7 gets the company back on its feet, you should probably follow Tim Cook and buy Apple yourself, while sentiment is in the gutter.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/aapl-stock-buyback-apple-inc/.

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