Is a share buyback the best Apple could do with $14 billion?

February 7, 2014
Obsession
Mobile Web
February 7, 2014

Over the past two weeks, Apple has bought $14 billion worth of its own shares. The reason? According to chief executive Tim Cook, “It means that we are betting on Apple. It means that we are really confident on what we are doing and what we plan to do,” Cook told the Wall Street Journal (paywall).

But what exactly is Apple doing? The decision to buy back more shares, rather than, say, a smart deal or a huge bump in R&D spending may leave investors confused.  The stock buyback, after all, is several times the size of recent, potentially game-changing acquisitions made by Apple’s rivals—it is over four times what Google paid for Nest, the connected home devices manufacturer that we here at Quartz think could be bigger than Android. And it’s still less than 10% of Apple’s $160 billion cash pile.

The company has bought $40 billion of its shares over the past year—a record for any company over a comparable time frame, Cook told the Journal, and has pledged to return $100 billion to return to shareholders by the end of 2015. After Cook’s interview with the journal, Apple’s share price was down 0.2%, at $512.5 as of market close.

The long term benefit of massive stock repurchases is debatable. Companies that go heavy on stock buybacks usually end up creating less value for shareholders (paywall) over time, according to George Milano of Fortune Advisers, a corporate finance consultancy in New York. Sure, it is a useful strategy when a company’s shares are undervalued, as some analysts believe Apple’s have been at various points over the last year. But given that Apple’s stock is up more than $100 from its low this year in July, getting investor Carl Icahn off the company’s back might be the company’s real motivation right now.

Isn’t this money that Apple should be using instead to build a new product category, along the lines of the first iPod, the iPhone or the iPad (Apple’s last big new product, which came out in 2010)? Apple has been losing market share to its smartphone makers using the Google Android operating system, and the company’s falling stock price last year reflected investors worry that the “magic” that made it one the most innovative companies on the planet is gone.

The company’s fans are holding out hope that a new product is just around the corner, as Motley Fool wrote recently: 

Apple bears who claim that buybacks are a sign that innovation is dead at Apple miss the fact that Apple is spending an ever growing amount on R&D. In 2005 and 2006 — when Apple was developing the iPhone — Apple spent a 2-year total of $1.25 billion on R&D . By contrast, Apple spent a whopping $1.33 billion on R&D last quarter alone!

Apple’s most recent “innovation,” though, is reportedly to bring back the iPhone 4 for India and other emerging markets. And the company’s R&D spending is still far less than its more nimble rivals.

Cook dangled the promise of radical change in his interview with the Journal, saying any “reasonable” person would consider what Apple is building now as new categories, not just upgrades to existing products. (We’ve previously run through the speculation about new products Apple could release in 2014 here.) But if all Apple comes up with next is its version of a phablet, many people, including the company’s shareholders, will be disappointed.

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