Ever since the earnings release of Apple on 1st November. Apple’s share price has crashed almost $50. Currently, it is trading between $180+ to $190+.
At PE 15.66, it can be quite attractive to enter. However, one of the reason behind the drop in share price is that Apple will no longer report the number of units that they sell in future.
That may signifies that Apple is no longer a growth company, which means investors should no longer be investing at high PE.
Let’s assume that Apple is no longer a growth company, so, what is a fair value for the company?
Nobody will be able to give an answer to that. Not even Tim Cook.
What investors can do is that they can understand the company and look at different matrix from the company to try and determine a fair value as per their opinion.
One thing that to look at is share buyback.
From the latest SEC filings, as of 29/9/2018, $29 billion out of the $100 billion budget has been used to buy back shares.
We can see that shares were re-purchased on 3 different time periods.
The average buy prices of each of the time periods are $192.50, $214.07 and $222.07.
All of which are higher than the current Apple stock price of $185.86.
This shows that the management of Apple are willing to buy their own shares back at above the price now.
What is so good about share buyback?
When a company has excess capital, there are so much more that the company can do that can worsen their own current position. They can spend money on acquiring another company. They can spend money on acquiring another technology. They can spend money on a new venture/technology that may not work out. They can put the money in their bank account to get pittance amount of interest. They can issue dividends. They can buy back shares.
The last 2 are shareholders friendly actions. Share buyback is generally a valued move as it returns value to the shareholders. Instead of spending the money on ventures that may not work, it may be better to reinvest the excess cash if the management has nothing to invest in. However, leaving the excess cash in the bank is also not a wise move. Therefore, share buybacks is one of the best ways to utilize the excess cash.
When a company buyback their shares, it is reducing the number of shares on the market. When the number of shares in the market is lower, it generally pushes up the stock price, thereby, increasing the value of the company as well as the net worth of their shareholders.
When the number of shares is reduced, the ownership of existing shareholders increases.
Warren Buffett’s Take
Warren Buffett is a supporter of share buyback. He is such a supporter that his company, Berkshire Hathaway has never issued dividends, preferring to buy back shares whenever the price is right.
The keywords are “whenever the price is right”.
Share buybacks are so popular nowadays that everyone is doing it. Sometimes, it is done for the sake of doing it. It is after all a move popular with shareholders. Warren Buffett believes that buyback at high valuation is not a wise move.
Buyback should only occur at a fair value, a value that the management feels that the company is worth more.
Now back to Apple. With Apple trading at PE 15.66, we know that share buyback has been occurring at a price above what it is trading at now.
Stocks at low valuations are the best time to buy back shares. Warren Buffett has once commented on Apple that, “I’d rather have it go down for one thing, if it goes down Apple is going to buy a lot of stock back, already buying stock back. If it goes down 10 percent it means they get to buy 10 percent more shares and my interest will go up 10 percent more for spending that money.”
I cannot argue with that. I simply cannot.
Well, the information disclosed to us was last updated on 29 September 2018, which is almost 2 months ago. It will be interesting to know how much more did Apple buy at current price.
It is definitely reassuring to know that you can now buy Apple shares at prices below that of the company.
Reassuring Fact no. 2
Reassuring fact number 2 is short and sweet.
Warren Buffett, currently the largest shareholder of Apple, purchased his Apple shares at an average of $208.30 for the latest quarter.
From gurufocus, we can see that the average buy price of Warren Buffett is about $145.89 per share. He has slowed down his purchase when the share price was around the $200+. However, the highest number of purchase occurs at around an average price of $172.19.
As of article update, Apple was trading at around $174.24, which is around the same as Warren Buffett’s buy price during 2018 Q1, where Warren Buffett purchased the most number of shares. Well, if Apple is a bad investment, you will know that, you are not the only one making the same bad investment.
It will also be interesting to know the average buyback price of Apple during this quarter, which will only be disclosed during the next SEC filings.
#Update. A reader has pointed out to us that $208.30 was the average entry price by Warren Buffett for the latest quarter. To make things clearer, the article has been updated with some extra content.
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