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Apple slammed! Why buybacks are for iDiots: Macke


Yesterday Apple (AAPL) shares fell 8% despite the company reporting record earnings. The 1-2 punch of beating EPS estimates followed by a stock drop has been something of a trend this year. Despite 2/3 of the companies reporting exceeding earnings estimates this quarter, the S&P500 (^GSPC) has dropped more than 2% year-to-date. 

There are plenty of reasons for the the drop in share prices, the most obvious being the generally poor outlooks and increasingly uncertain picture in emerging makets. In terms of earnings themselves, the simplest explanation for analysts overlooking EPS coming in "better than expected" is that net income has been disappointing. Corporate America is trying to buy its way into apparent growth by buying back shares and investors are crying foul.

Buyback Math

For the last couple years companies have been trying to sell the idea that EPS growth is the same thing has earnings growth. EPS is just net income divided by shares outstanding. That means companies can grow EPS by either a) growing net income or b) reducing shares by spending billions buying back stock.

Apple went with option 'B.' Net income for last quarter came to $13.072 billion compared to $13.078 billion in the same quarter for 2102. EPS was a record high $14.50 per share because Apple spent $5 billion buying back stock. If not for the buyback, Apple would have posted EPS of $13.80 vs. $13.81 last year.

Adding insult to idiocy Apple paid $525 per share for 9.5 million shares. Those now retired shares lost $380 million in value on paper yesterday and are down $209 million since Apple bought them on the open market (which was falsely billed as “returning money to shareholders”).

Buybacks don’t work in any tangible way. Buybacks don’t drive earnings, create a “floor for the stock,” or return money to share owners. Apple took $5 billion in shareholder cash and vaporized it in the name of creating higher earnings per share.

Based on the early figures, the best guess is that about $500 billion worth of stock was repurchased by corporations in 2013. It's the second largest total on record, trailing only 2007. Note that in 2008 the S&P500 fell more than 38%, the third worst annual performance in market history.

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