By H.Baloch 
Apple Inc., the manufacturer of Mac computers and iPhones, has recently disclosed its intention to repurchase shares of its stock from its shareholders for an unprecedented $110 billion.
Richard Warr, associate dean for faculty and research and finance professor at Poole College, elucidates the rationale behind buybacks by companies such as Apple and the implications for investors.
First, let’s take a quick look at buybacks, sometimes known as repurchases. Could you visualize them as the organization conducting its inventory purchasing? They first disclose their strategy and then commence the acquisition of shares on the stock market, typically at the current market price. However, the organization may occasionally submit a tender offer or specify a fixed price that it is prepared to pay. Alternatively, it may engage in direct negotiations with significant shareholders.
The company has expended a portion of its cash following the buyback, resulting in a decrease in the number of shares available for trading by investors.
In what ways does this buyback differ from Apple’s previous ones?
Apple has a history of conducting substantial buybacks; in 2018, the company conducted a $100 billion buyback and continued to do so annually from 2021 to 2023, with an average of $90 billion. In addition to dividends, which are consistent payments to shareholders, Apple appears to regard buybacks as an effective method of distributing profits back to stockholders.
Apple maintains flexibility by opting for substantial annual buybacks rather than larger dividends. This is equivalent to having an option open rather than committing to continuous payments that are not contingent upon the business’s performance each year.
What is the reason for companies to repurchase shares?
There are numerous factors, most of which are associated with providing value to stakeholders. The following are the most frequently encountered:
Investing surplus amounts of cash
If a company has an excess of funds that it cannot allocate to initiatives such as expanding its operations or developing new products, it may allocate a portion of that money to the repurchase of shares. This provides shareholders with additional funds that they may allocate to alternative investments.
Buying stocks at a discount
Sometimes a company thinks its shares are selling for less than their true value. They believe they are receiving a decent value for their money by purchasing back shares at these “discounted” prices.
Restoring the value of shares
Sometimes, companies provide their employees with exclusive opportunities to purchase shares as part of their compensation. When employees utilize these alternatives, the aggregate number of shares available may increase, thereby diminishing the share of all other stakeholders. Buybacks may serve to mitigate this imbalance.
Adjusting the debt-equity ratio
Companies strive to maintain a precise equilibrium between debt and shareholder equity as if they were swaying on a seesaw. Buybacks can diminish stakeholder equity, thereby assisting in the preservation of the company’s optimal equilibrium between debt and equity financing.
Can buybacks enhance the value of a company?
The share price of a company frequently increases when it announces a buyback, as investors perceive it as positive news. Following its announcement, Apple’s stock value increased by approximately 6%.
Companies frequently attribute the price increase to the fact that, following a buyback, each share receives a larger portion of the profit sum when fewer shares are available. Earnings per share increased.
Nevertheless, it is important to bear in mind that the company also expended money to accomplish this. Therefore, the buyback does not result in a magical increase in overall value. It’s like reducing the number of portions on a pizza to increase its size.
Informed investors likely believe the stock is undervalued, and management is signaling its agreement. Additionally, investors may believe that the company appears optimistic about its future. They might also think that management is making the right decision by distributing cash rather than hoarding it.