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Apple Stock: The “Trick” That Can Push Share Price Higher

Corporate America continues to aggressively buy their own shares, following a pullback in activity during the pandemic. This is how Apple stock investors should benefit.

S&P Dow Jones Indices has reported that US-based companies continue to invest heavily in… their own stock. Share buybacks in Q2 has risen nearly 12% sequentially and 124% YOY. This is a strong rebound from the post-COVID period of uncertainty that led to a temporary reduction in repurchase activity.

This is a reminder for Apple stock  (AAPL) - Get Apple Inc. (AAPL) Report investors that the Cupertino company’s share price can continue to benefit from stock buybacks. The Apple Maven recaps why this might be the case.

Figure 1: Apple store in New York, NY.

Figure 1: Apple store in New York, NY.

(Read more from the Apple Maven: Apple Stock To Crumble Along With S&P 500, Says One Expert)

Apple’s “secret sauce”

A bit over a year ago, I talked about one of Apple’s tricks to driving share price higher in the past decade. “Tenfold in ten years” was possible not merely because of robust business fundamentals. Sure, the popularity of the iPhone and success of iPad contributed greatly to compelling stock performance. But share repurchase was also an important piece of the puzzle.

Think about it: since 2011, Apple’s net income grew an impressive 190%. But at the same time, EPS (earnings per share) shot up by 325% over the same period. This “net income leverage” effect was only possible because share count was slashed by around 30% between 2013 and 2020. See chart below, which was published in June 2020 and not adjusted for the most recent stock split.

Figure 2: Apple's net cash & shares outstanding since 2011.

Figure 2: Apple's net cash & shares outstanding since 2011.

In the S&P’s most recent report, Apple was cited as the leader of the pack in stock buybacks by “not only spending the most of any [company], but its Q2 expenditure ranked second highest in S&P history”. The Cupertino company seems highly committed to supporting its stock, which should be a bullish sign.

(Read more from the Apple Maven: Wall Street Agrees: Buy Apple Stock Following App Store Scare)

Apple Maven’s take: quick math

Continuing to retire shares is, in my view, a crucial tenet of the investment thesis on AAPL stock – and Apple’s management team seems to agree. Year-to-date, the Cupertino company has spent $66.2 billion on repurchases, 20% more than in fiscal 2020. The figure is massive, as it has represented nearly 90% of the free cash flow that Apple has produced in fiscal 2021 so far.

At this pace, and assuming a share price of $150 apiece, Apple can retire around 600 million shares per year going forward, or just short of 4% of the total number of shares outstanding annually. Give it five years, and Apple’s share count could drop by almost 20%.

Think of the EPS calculation, which is net income divided by shares outstanding. Repurchases alone can boost Apple’s bottom line quite substantially. Assuming the stock’s P/E valuation does not change, it is fair to say, roughly, that AAPL stock can rise some 20% by 2026 due to buybacks alone.

For this reason and given the recent reports of a pickup in share repurchase activity across Corporate America, Apple investors have good reasons to be optimistic about share price performance.

Twitter speaks

Corporate buybacks have rebounded, following a pullback period driven by the COVID-19 crisis. What do you think of Apple’s stock repurchase policy?

Is the price right?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)