Apple Inc. (NASDAQ:AAPL)‘s latest move of buying $14 billion of its shares in two weeks, when the prices were down, may not have appeared satisfactory to those demanding a new product such as a smartwatch to boost sales, but it could be enough to silence a few critics, at least for a while. The move serves a few other key purposes as well. Following the news, Apple shares gained 1.4% on Friday to $519.68.
Buyback improves Apple metrics
The buyback does appear to be a smart move from Chief Executive Tim Cook that allows him to not only to buy the shares cheap, but also to answer big investors like Carl Icahn, who have been demanding more money for shareholders.
Apart from serving the above purposes, the buyback also improves key valuation metrics for Apple Inc. (NASDAQ:AAPL) including the first quarter estimates. Now, for the first quarter, Apple is expected to earn $10.48 a share, up from $10.15 previously. The increase in the estimate is mainly due to the 3% reduction in the float, according to Greg Harrison, senior research analyst at Thomson Reuters.
Apple’s forward price-to-earnings ratio is now 11.65 from 12.02, moving further below the 13.02 average P/E of its peers. If Apple would have bought the shares before the fourth quarter, then its profit would have been $14.96 a share instead of $14.50, says a report from Reuters.
Buyback working for most
According to Minyi Chen, who manages the TrimTabs Float Shrink ETF, “If you’re a long-term investor in Apple, this is a reason to buy,” and added “This is more of a value-stock strategy than a growth-stock strategy.” The ETF added Apple Inc. (NASDAQ:AAPL) on Thursday.
Big U.S. firms have been following a trend of reducing their share count steadily, and this strategy has worked for most of them. Between 2003 and mid-2013, S&P 500 companies that have lowered their share counts regularly have returned 550% compared to 400% returned by “dividend aristocrats.”
The buyback from Apple Inc. (NASDAQ:AAPL) is a part of the $60 billion repurchase from the iPhone maker. Apple has been struggling to recapture the impressive growth rates, it enjoyed previously, owing to a lack of new products. However, the buyback does reflect the confidence management has in the company.
A couple of weeks back Icahn bought another $500 million of Apple shares. The proposal from the activist investor that Apple Inc. (NASDAQ:AAPL) should return $50 billion more through share buybacks is due for a vote at the February 28 shareholder meeting.