The investment that cost Apple US$9bil in 2018

Recent plunge in stock prices makes buyback strategy look like a bad idea

APPLE Inc has lost more than US$9bil this year on an underperforming investment – its own stock.

Like many large companies, Apple has used much of its windfall from the 2017 tax overhaul to buy back shares. But the recent plunge in stock prices has made that look like a bad idea. Apple and companies including Wells Fargo & Co, Citigroup Inc and Applied Materials Inc repurchased their own shares at rich prices, only to see their value decline sharply.

In effect, the market has told them they overpaid by billions of dollars. While Wednesday’s rebound mitigated the damage, the S&P 500 has fallen 15.2% from its September high through Wednesday’s close. The index is down 7.7% for all of 2018.

Companies contend that buybacks are a good way to return excess capital to shareholders and that the paper losses can reverse themselves if their stocks rebound. But the sharp declines call into question their decision to devote so much of their tax savings to buybacks, rather than using it to invest in their businesses, raise employee pay or pay higher dividends.

“If they made an acquisition that decreased in value this much, people would be up in arms,” said Nell Minow, vice chairwoman of ValueEdge Advisors, a corporate-governance consulting firm. “They have one job, and that is to make good use of capital.”

When the market was riding high, companies bought back shares at a furious pace, juiced by the tax savings they reaped from the December 2017 passage of the Tax Cuts and Jobs Act. The law enriched companies by slashing the corporate tax rate to 21% from 35% and making it easier for firms such as Apple to shift foreign earnings to the US.

S&P 500 companies bought back US$583.4bil worth of their own shares in the first nine months of 2018, according to S&P Dow Jones Indices, up 52.6% from the same period in 2017 and just shy of a full-year record.

Nearly 18% of S&P 500 companies reduced their share counts by at least 4% year-overyear, according to S&P Dow Jones Indices.

Apple, one of the market’s biggest repurchasers, spent about US$62.9bil on buybacks in the first nine months of 2018, according to securities filings. But the sell-off has weighed on its shares.

The company’s repurchased shares were worth about US$53.8bil as of Wednesday’s close, some US$9.1bil less than it paid for them. Apple repurchased shares at monthly average prices as high as US$222.07, according to securities filings. The stock closed at US$157.17 on Wednesday.

An Apple spokesman declined to comment. In May, Luca Maestri, Apple’s chief financial officer, said the company wanted to be “particularly thoughtful and flexible” in its buyback approach. In addition to buybacks, Apple said in January it planned to create 20,000 US jobs and invest US$30 billion in US operations over the next five years.

“Apple makes iPhones. Timing the market is not what they do,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Companies that try to time the market in buying back shares “are going to be in the red at times.”

Some big banks have encountered the same issue. Wells Fargo spent about US$13.3bil on buybacks from January through September for shares now worth US$10.6bil, about US$2.7bil less than they paid. Citigroup spent US$9.9bil on buybacks in the nine-month period for shares now worth about US$7.1bil, about US$2.8bil less.

Both banks bought back some shares at monthly average prices that weren’t far below their 52-week highs, and both companies’ share prices have fallen well below those levels.

Wells and Citigroup declined to comment. Big banks’ share-buyback plans are subject to Federal Reserve approval, but the banks have discretion to spend less on buybacks than their authorized amount.

Applied Materials spent about US$4.5bil for shares now worth US$2.7bil – about US$1.8bil less. The stock has declined 40% this year.

Applied Materials bought back many of its shares for prices above US$50; the stock closed Wednesday at US$30.64. Applied Materials didn’t respond to requests for comment.

Still, buybacks can help companies in other ways. Buybacks reduce share counts, boosting the earnings per share companies report to their investors.

Apple’s buybacks this year, for instance, have reduced its shares outstanding by about 6.7%, raising its earnings per share as the company’s profits are spread across fewer shares. “It’s immediate gratification,” Silverblatt said.

It is possible some companies may take advantage of the currently beaten-down prices to buy back more shares. But many companies are heading into their pre-earnings blackout period, when they can’t buy back stock because they know what their forthcoming quarterly earnings will look like.

And companies remain nervous about the volatility in stock prices, Silverblatt said.

“It’s hard to fight the market.”