4 Reasons Why Buybacks Happen: An Apple Case Study | Exploring Markets

4 Reasons Why Buybacks Happen: An Apple Case Study

Here are 4 reasons why a company would buyback its stock or engage in a share repurchase program. We explain this through an example of Apple -- the largest and most followed company in the world. Apple also has the most cash on hand at roughly $155 billion in the bank.

Since 2014, Apple has been using a lot of its cash to buyback its own stock. In-fact, Apple has already spent a massive $45 billion buying back its stock since 2014 started.

Why would Apple do this? Here are 4 excellent reasons why courtesy of the Reddit stock thread:

"1.) In general companies buy stock back as part of their management and board's fiduciary duty to shareholders to provide shareholder value. If there is excess cash not in use (a major issue with Apple who generally sits on over $130B in cash), then the company's duty to shareholders is to return that cash back to them either in the form of dividends are stock buy back. In Apple's case they do both.

2.) Buying shares back also gives board/management/company more control because there are less voting shares out in the public. This is sometimes a concern when activist investors get involved which is the case with Carl Icahn and Apple right now. Google created two classes of shares, one voting and one non-voting to protect against this very sort of thing. however, some shareholders want the voting rights to help influence corporate decisions. For most regular Joe's this is not really relevant.

3.) Buying shares back may indicate that the company believes the price of the stock is low. It reduces the amount of dividends they have to pay to outsiders and at the same time gives them the ability to re-issue those shares later at a higher price when the stock is trading much more favorably. This is a clean and quick way to raise capital without really having to source it from somewhere more complicated like debt.

4.) A lot of companies contract third parties and pay them in equity rather than cash. In order to pay with equity, there has to be stock available to give. A company can issue more shares, but it would dilute the stock and may adversely impact the stock price. This gives a company like Apple extra shares to use for contract work or MnA activity without risking dilution."

Source: Reddit, r/stocks, Apple buyback question