If there’s one thing that feels like Christmas to Warren Buffett is when Apple (NASDAQ:AAPL) repurchases AAPL stock. After all, the more Apple stock the iPhone maker buys back, the more significant percentage of Apple Berkshire Hathaway (NYSE:BRK.B) owns.
In Berkshire’s 2021 shareholder letter, Buffett mentions that his company spent no money to increase its ownership stake to 5.5% from 5.39% in 2020. Share repurchases by Apple in 2021 added $1.1 billion in earnings controlled by Berkshire’s investment.
“It’s important to understand that only dividends from Apple are counted in the GAAP earnings Berkshire reports – and last year, Apple paid us $785 million of those. Yet our ‘share’ of Apple’s earnings amounted to a staggering $5.6 billion,” Berkshire’s 2021 shareholder letter stated.
“Much of what the company retained was used to repurchase Apple shares, an act we applaud.”
Warren Buffett might like the Apple buybacks, but the average investor has three reasons to consider why it’s not a win for regular AAPL stock investors.
It Significantly Overpaid for AAPL Stock
Apple has spent more than $500 billion in share repurchases since 2012. The company had 929.4 million shares as of Oct. 14, 2011. On Oct. 14, 2023, it had 15.91 billion shares. Apple’s stock has split on two occasions over this period — a 7-for-1 split on June 9, 2014, and a 4-for-1 split on Aug. 28, 2020 — which increased the share count. Considering the two splits, it reduced its share count by 39% [929.4M x 7 x 4 minus 15.91B divided by 26.02B].
That seems like a great deal for Apple shareholders.
Have you ever considered what it could have paid for these shares?
In fiscal 2022, the company repurchased $90.2 billion of its stock at an average price of $158.52. It is the most repurchased in a single year in the company’s history. Based on its current share price, it has a 10.1% return on its investment.
In the 12 months between Sept. 22, 2021, and Sept. 23, 2022, Apple’s high was $182.94 in January 2022, while its low was $129.04 in June 2022. The average of the high and low during the year was $155.99. It paid $2.53 more per share than the average. Conservatively, that’s over $1 billion too much.
I would bet dollars to donuts; it’s done this every year since 2012.
Reinvestment of Funds Used Could Have Developed a New Killer Product
Despite the possibility of a virtual reality (VR) headset and driverless car, the iPhone remains Apple’s key product and revenue generator. ZDNet reminded its readers in September 2022 that only 11.2 million VR headsets were shipped in 2021 compared to 1.3 billion smartphones. That’s 116x as many.
In June this year, AAPL stock launched the Apple Vision Pro, a $3,500 augmented reality headset. It is controller-free and can switch from AR to full VR with the flip of a switch—while very cool, the product’s unlikely to move the revenue needle for several years.
The launch is the company’s first major product since 2014. It’s expected to generate annual revenue of over $20 billion by 2037. That’s more than a decade away.
In the meantime, the company has spent tens of billions of dollars on developing this product. If it had cut its share repurchases by half over the past decade, it would have created a better product by now with the $250 billion in reallocated investment capital.
These Repurchases Benefit the Buffetts of the World
As I already mentioned, the share repurchases made by Apple in 2021 added $1.1 billion in earnings to its share of the money-maker’s total pie. At the end of 2021, its share was $5.6 billion. Buffett rightly called it “staggering.”
Buffett would argue that the same principle applies to every shareholder. But does it? You can’t go into the bank and say, “My Apple shares amount to $1,000 of its earnings. Can I get a loan?”
You could, but I’m not sure how successful you’d be. On the other hand, Buffett almost certainly used its share of earnings to secure funding for its other businesses.
As the saying goes, if you owe your bank $1 million, you have a problem. If you owe your bank $1 billion, they have the problem.
Of course, Buffett will say Apple repurchases are a great thing — for the record, Berkshire is one of my most recommended stocks for InvestorPlace — because they benefit his company more than most.
Even large institutional investors don’t benefit the way Buffett and Berkshire do.
Buffett is a classic “Do as I say, not as I do” investor. When he says things, you have to remember that often, it’s with his interests in mind. It’s not a bad thing; it’s just a reminder that mindlessly following the actions of billionaires won’t guarantee you the same kind of success.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
