What are stock buybacks?

Look, I am not trying to start a fight or nothing, but the Chiefs get some pretty good looks from the refs… I realize a large part of this is confirmation bias. They are the team to beat, so every call that goes their way is more evidence to the point. However, when the announcers are calling out the refs, it has to be pretty blatant because of the strict rules the NFL puts on what the announcers can and can’t say.

Stock buybacks, or share repurchases, are when a company purchases its own shares off the open market. This lowers the number of available shares increasing the price. The definition of supply and demand.

There are couple reasons companies perform buybacks:

1. Increase the share price

2. Prevent a shareholder from taking a controlling interest 

3. Issue stock options to employees without diluting shares

#2 and #3 are rarely the true reason for stock buybacks. They are just nice excuses for #1 which I am going to talk about last because it is the most frustrating. 

2. Prevent a shareholder from taking a controlling interest

In a world foreign to us retail investors, large investors can purchase substantial percentages of outstanding shares in a company to gain control over a company's actions. 

A company can complete a stock buyback to make it more difficult (or impossible) for one investor to gain a significant portion of shares thus preventing them from getting a controlling interest.

3. Issue stock options to employees without diluting shares

A lot of companies will offer stock options to their executives and employees. When issuing stock options, a company can create new shares or repurchase existing shares. If they create new shares, they dilute the number of shares available which decreases the price per share. If a company repurchases shares, they increase the value of the share for employees and, more importantly, executives.

1. Increase the share price

Okay. Now for the reason I hate stock buybacks. 

If a company (like Apple) has a lot of cash on hand, there are dozens of things they can do with the cash. They can invest in new products, expand to new areas, or research new technology. They could increase employee compensation or decrease their prices (which they won’t do because that would hurt earnings). They could issue dividends or repurchase shares to reward their investors. 

If they issue dividends, their investors (more importantly executives) would have to pay taxes on that compensation regardless of if they sell shares or not. If they repurchase shares, however, they indirectly increase the value of investors' (EXECUTIVES, MORE IMPORTANTLY) positions without directly paying them, thus avoiding taxes. Then, only investors who want to sell shares would pay taxes. 

A company may perform a stock buyback to increase the price per share if they believe their stock is undervalued. In other words, if a company disagrees with the free market evaluation of their company, they will put their finger on the scale. Capitalism… right?

Stock buybacks are short term, market manipulation tactics that increase cash in executive pockets prioritizing share price over innovation and growth.

Let’s look at Apple.

Steve Jobs died in October of 2011. Apple completed its first share buyback in 2012. Since then, it has spent $800 billion in share repurchases with $110 billion in 2024.

Steve Jobs and Warren Buffett (a big buyback-er) had a conversation about what Apple should do with large cash reserves. Buffett brought up that Apple could buy back stock to increase the share price. Jobs didn’t complete any buybacks and kept cash on hand at Apple to prioritize growth, new products, and potential acquisitions. 

Since 2012, Apple has launched the Watch, AirPods, and Vision Pro among other smaller products like the pencil and “magic” mouse. If you feel like Apple has been stale for the past ten years, I’d agree with you. Although I love the Watch and AirPods, the iPhone looks and acts the same while Samsung and Huawei try novel designs and features. 

Tim Cook is not Steve Jobs. I believe the timing of buybacks indicated a shift in Apple’s focus from creating unbelievable products to increasing the share price.

I say all of this while using exclusively Apple products because I love them so much. I just don’t believe they have pushed the bounds of tech since 2011.

To me, Apple symbolizes how stock buybacks are fundamentally at odds with a growth mindset for a company. I believe every stock buyback inches us closer to a bubble forming and popping. They increase the share price without adding value to the market. 

In 2022, 2023, and 2024, as we were suffering from high inflation blamed on COVID supply chain shocks, increased government spending, and uncontrollable market situations, companies were doing everything they could to lower prices for us right? … right? Surely corporate profits increasing 29% since the pandemic and the $1 TRILLION spent each year on stock buybacks have nothing to do with it.

Debrief on Deck

Next week, we have our January monthly market debrief. If you told me one titan would fall in January, I would have guessed it was the Chiefs, not NVIDIA.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on Instagram.

Until then, stay the course.

Disclaimer