Apple announces biggest stock buyback in history. What is a stock buyback?

After better than expected quarterly results, Apple Inc. has announced a share buyback which is unprecedented in history: a whopping 110 billion dollars. Shares of the US tech giant soared over six per cent on Friday, after the announcement. 

The value of the company went up by almost 200 billion dollars, making it worth about 2.86 trillion dollars.

This is the second highest value for a company, after Microsoft, which is worth 3 trillion dollars. If Apple buys back all the shares it said it would, it will own nearly 4 per cent of its own company.

What is share buyback?
 

Share buyback, also known as a stock repurchase, is a strategic financial move where a company repurchases its own shares from the market. This process involves the company reducing the number of available shares on the market, which subsequently decreases the total outstanding shares. 

Share buybacks can be executed through two primary methods: on-market buybacks, where shares are repurchased on the stock exchange, and off-market buybacks, where shares are bought directly from shareholders. The decision to engage in a share buyback is often driven by various reasons and can have significant impacts on both the company and its shareholders.

Reasons for share buyback

Utilising excess cash: When a company finds itself with surplus cash but insufficient investment opportunities, stock buybacks offer a strategic alternative to accumulating idle funds. Rather than letting cash reserves sit idle, companies with strong financial positions prefer to utilise it effectively through buybacks.

Tax-efficient rewards: Compared to dividends, share buybacks offer tax advantages for both companies and shareholders. Unlike dividends, which are taxed at multiple levels, buybacks are subject to a single tax deduction before distributing earnings to shareholders, making them a more tax-effective option.

Consolidating control: As the number of shareholders increases, decision-making can become cumbersome and may lead to power struggles within the company. To avoid such complexities and consolidate control, company boards often opt for share buybacks, thereby increasing their influence and voting rights.

Signalling undervaluation: When a company initiates a share buyback, it can signal to the market that it perceives its own shares to be undervalued. This not only addresses undervaluation but also portrays confidence in the company's future prospects and current valuation.
 

Additionally, share buybacks may serve to enhance overall company valuation or reward existing shareholders, among other objectives.

Impact of share buybacks:

The impacts of share buybacks can vary, with potential benefits for both the company and its shareholders. However, there are downsides to consider. While share buybacks can boost earnings per share and lead to higher valuations, they are not guaranteed to generate returns. If a company faces difficulties post-buyback, shareholders may not see the anticipated share price increase. Additionally, if a company borrows money to repurchase shares, it can impact its credit rating, potentially leading to credit downgrades if economic conditions turn unfavourable.