Apple Inc: What's the Benefit of Buybacks?

Apple shares have seen a resurgence of momentum, but because of recent history, investors continue to hold their breath and pray that shares can exceed that emphatic $700 level without another steep turnaround. Nonetheless, Apple's previous high of $705 is considerably less significant than it was in 2012, and like IBM , this is due to the benefit of buybacks.

The Apple run-down
Buybacks are often discussed by investors. Unlike dividends, they can't be measured as something that is given to you from a company. Yet, buybacks remain many companies' favorite form of returning capital, especially in low interest rate environments, and the effect of these actions can be seen no better than in shares of Apple.

On September 2012, Apple reached $705 per share with 939 million shares outstanding. This gave the technology giant a market cap in excess of $660 billion, making it the largest company in the world.


Then, shares of Apple fell off a cliff, falling below $400 just seven months after reaching its all-time high. Since then, Apple shares have recovered and are once more headed back toward $700, but with one minor difference: significantly fewer shares. There are now 861.4 million outstanding.

What does this mean?
If Apple reaches $705 at its current share count, the company's market cap would be $607 billion, far less valuable than its prior September 2012 high. Furthermore, Apple would have to reach a stock price of $770 to exceed its prior high in regards to valuation.

AAPL Shares Outstanding Chart

AAPL Shares Outstanding data by YCharts

The reason is because Apple has very quickly decreased its total shares, thus creating less supply, which essentially shows how buybacks work and why they are important.

With that said, there is a lot to like about Apple right now. In the company's last quarter, it boosted the buyback program from $30 billion to $90 billion and announced a 7-for-1 stock split, thus creating a lower stock price and attracting investors who don't want to own a $600 plus stock.

Apple, with buybacks, has become a new-look company, one that's still growing, but not to the same level that we saw in the late 2000s. With Apple now being a shareholder-friendly company, there is reason to believe the stock will not only continue to trade higher, but will exceed its previous valuation high over the long haul.

Final thoughts
IBM is a company that had nearly 1.4 billion shares outstanding in 2008, yet despite no revenue growth since, the stock has doubled and still trades at a rather attractive 12 times earnings. You might ask how is this possible? The answer can be seen in its buybacks, as its shares outstanding now sit at just one billion. As it appears, Apple is following the lead of IBM, while still growing. The stocks are valued similarly, which ultimately means that Apple stock could perform even better.

With all things considered, $700 for Apple is significant from a psychological stance, but rather insignificant as it relates to the valuation of this company. This is a company whose buyback program will eventually take its total shares outstanding well below 800 million, thus making a $700 stock price even more insignificant. The bottom line is that with revenue still growing, Apple continuing to innovate, and shareholders now embracing the company's new give-back identity, there doesn't seem to be anything in Apple's way of trading higher.

Leaked: Apple's next smart device (warning, it may shock you)
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The article Apple Inc: What's the Benefit of Buybacks? originally appeared on Fool.com.

Brian Nichols owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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