Markets

1 Incredible Chart That Captures The Magic of Apple, Inc.'s Share Repurchase Program

AAPL Shares Outstanding Chart

Generally speaking, share repurchase programs sometimes get a bad rap. There are two common criticisms of share repurchase programs. They can fail to offset dilution from equity-based compensation to employees, and/or they can be spectacularly mistimed .

However, in Apple 's case, its share repurchase program has been an unqualified success that has dramatically benefited shareholders since its inception.

The best kind of plunge

With regards to how a share repurchase program ultimately affects shares outstanding, just take a look at how Apple's shares outstanding has plunged in recent years. In this case, plunging is a good thing for investors.

AAPL Shares Outstanding data by YCharts

When companies tout buybacks, but those buybacks don't actually reduce shares outstanding, it amounts to posturing. Buybacks only deliver real shareholder value to the extent that they reduce shares outstanding, thereby driving earnings accretion.

In just over two years, Apple has reduced its total shares outstanding by 12%, bringing its share count to levels that the company hasn't seen in a decade. That's how earnings-per-share growth has outpaced net income growth in recent quarters. For instance, last quarter earnings per share soared 48%, easily outpacing net income growth of 39%.

To date, Apple has repurchased nearly $73 billion in shares. That's an incredible sum that exceeds the market caps of most companies. Buying back that much stock inevitably reduces shares outstanding by a lot .

Apple is cheap

In the wake of last quarter, Apple continues to push higher into uncharted territory, hitting fresh all-time highs and just recently becoming the first company to ever top $700 billion in market cap. In fact, if Apple hadn't been repurchasing shares so aggressively, its market cap would be closer to $810 billion right about now.

Needless to say, Apple's timing on its repurchases has been quite successful. The company bet big on itself during the pullback that occurred in 2013, which has paid off handsomely. Apple has long been cheap by many traditional valuation metrics (even now Apple trades at a discount to the S&P 500 ), so it may have seemed like an easy call from management's perspective.

Perhaps the most badly timed share repurchase program in recent memory was Netflix 's terrible trade in 2011 , where the online video streamer bought back shares at $221 only to turn around and sell shares to institutional investors ... at $70 per share. At the time, Netflix was trading at 70 times earnings, calling into question how prudent the buybacks were. With shares now over $450, it's all in the rear view mirror, but Netflix did destroy quite a bit of shareholder value with its poor timing.

For now, Apple's share repurchase program has worked wonders for investors thanks to its sheer size and accretive effects. The company's timing has also been fortunate, taking advantage of the prolonged dip to invest in itself.

Wall Street hacks Apple's gadgets! (Investors, prepare to profit.)

Apple forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering Apple's brand-new gadgets. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, just click here !

The article 1 Incredible Chart That Captures The Magic of Apple, Inc.'s Share Repurchase Program originally appeared on Fool.com.

Evan Niu, CFA owns shares of Apple and Netflix. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple and Netflix. 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 .

Copyright © 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

AAPL NFLX

Other Topics

Stocks

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More