Apple has been a monster stock for the past 10 years at least. The chart below, provided by Stock Rover, shows how shares of the Cupertino company have climbed ten-fold since 2010. Through bull markets and sharp pullbacks, the stock has outperformed the S&P 500 and even the FAAMG ex-Apple group – Facebook, Amazon, Microsoft and Alphabet.
The rise in Apple’s share price has been certainly grounded in strong business fundamentals. I could talk about the success of the iPad, launched in 2010, or the popularity of the iPhone 6. I could also discuss Apple’s impressive results in the services business: double the revenues in less than four years to a whopping $50 billion in the past twelve months.
But there is also a “trick” that the company has used to boost its results. Without it, maybe the stock would not have reached as high as it did.
“Leveraging” net income
Since 2011, Apple’s net income has risen an eye-catching 190%. The $57 billion posted over the past four quarters is the highest earnings produced by any S&P 500 company. But here’s something even more stunning: Apple’s earnings per share, or EPS, has increased 325% over the same period.
The apparent disconnect is possible because of share buybacks. For those not familiar with the process, companies can choose to spend its cash on hand in many ways: reinvest in the business, pay dividends to shareholders or repurchase their stock. Until 2013, Apple’s cash reserves kept piling up. So the company decided to buy its shares more aggressively, even issuing debt to get around its cash repatriation challenges.
A crucial lift to share price
The chart below shows a deterioration in Apple’s net cash position (cash and investments minus debt) over the past few years. One of the main reasons for the decline in cash balance has been share retirement. As a result, shares outstanding have decreased, as depicted by the dotted orange line– and also has the denominator in the EPS equation.
It is hard to isolate one single variable to understand how it may have impacted share price increase. For example, I believe that Apple’s aggressive stock buyback policy and increased dividend payments have also allowed valuations (e.g. price-to-earnings, etc.) to rise.
Still, I estimate that share repurchases accounted for between one-sixth and one-fifth of Apple’s stock appreciation over the past 10 years. It is one of the company’s “tricks” to impressive stock performance in the last decade.
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(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. Thanks for supporting The Apple Maven)