Apple and many others that poured tax savings into stock
repurchases show big paper losses
By Michael Rapoport and Theo Francis
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 28, 2018).
Apple Inc. has lost more than $9 billion this year on an
underperforming investment -- its own stock.
Like many large companies, Apple has used much of its windfall
from the 2017 tax overhaul to buy back shares. But the recent
plunge in stock prices has made that look like a bad idea. Apple
and companies including Wells Fargo & Co., Citigroup Inc. and
Applied Materials Inc. repurchased their own shares at rich prices,
only to see their value decline sharply.
In effect, the market has told them they overpaid by billions of
dollars. While Wednesday's rebound mitigated the damage, the
S&P 500 has fallen 15.2% from its September high through
Wednesday's close. The index is down 7.7% for all of 2018.
Companies contend that buybacks are a good way to return excess
capital to shareholders and that the paper losses can reverse
themselves if their stocks rebound. But the sharp declines call
into question their decision to devote so much of their tax savings
to buybacks, rather than using it to invest in their businesses,
raise employee pay or pay higher dividends.
"If they made an acquisition that decreased in value this much,
people would be up in arms," said Nell Minow, vice chairwoman of
ValueEdge Advisors, a corporate-governance consulting firm. "They
have one job, and that is to make good use of capital."
When the market was riding high, companies bought back shares at
a furious pace, juiced by the tax savings they reaped from the
December 2017 passage of the Tax Cuts and Jobs Act. The law
enriched companies by slashing the corporate tax rate to 21% from
35% and making it easier for firms such as Apple to shift foreign
earnings to the U.S.
S&P 500 companies bought back $583.4 billion worth of their
own shares in the first nine months of 2018, according to S&P
Dow Jones Indices, up 52.6% from the same period in 2017 and just
shy of a full-year record.
Nearly 18% of S&P 500 companies reduced their share counts
by at least 4% year-over-year, according to S&P Dow Jones
Indices.
Apple, one of the market's biggest repurchasers, spent about
$62.9 billion on buybacks in the first nine months of 2018,
according to securities filings. But the selloff has weighed on its
shares.
The company's repurchased shares were worth about $53.8 billion
as of Wednesday's close, some $9.1 billion less than it paid for
them. Apple repurchased shares at monthly average prices as high as
$222.07, according to securities filings. The stock closed at
$157.17 Wednesday.
An Apple spokesman declined to comment. In May, Luca Maestri,
Apple's chief financial officer, said the company wanted to be
"particularly thoughtful and flexible" in its buyback approach. In
addition to buybacks, Apple said in January it planned to create
20,000 U.S. jobs and invest $30 billion in U.S. operations over the
next five years.
"Apple makes iPhones. Timing the market is not what they do,"
said Howard Silverblatt, senior index analyst at S&P Dow Jones
Indices. Companies that try to time the market in buying back
shares "are going to be in the red at times."
Some big banks have encountered the same issue. Wells Fargo
spent about $13.3 billion on buybacks from January through
September for shares now worth $10.6 billion, about $2.7 billion
less than they paid. Citigroup spent $9.9 billion on buybacks in
the nine-month period for shares now worth about $7.1 billion,
about $2.8 billion less.
Both banks bought back some shares at monthly average prices
that weren't far below their 52-week highs, and both companies'
share prices have fallen well below those levels. Wells and
Citigroup declined to comment. Big banks' share-buyback plans are
subject to Federal Reserve approval, but the banks have discretion
to spend less on buybacks than their authorized amount.
Applied Materials spent about $4.5 billion for shares now worth
$2.7 billion -- about $1.8 billion less. The stock has declined 40%
this year. Applied Materials bought back many of its shares for
prices above $50; the stock closed Wednesday at $30.64. Applied
Materials didn't respond to requests for comment.
Still, buybacks can help companies in other ways. Buybacks
reduce share counts, boosting the earnings per share companies
report to their investors.
Apple's buybacks this year, for instance, have reduced its
shares outstanding by about 6.7%, raising its earnings per share as
the company's profits are spread across fewer shares. "It's
immediate gratification," Mr. Silverblatt said.
It is possible some companies may take advantage of the
currently beaten-down prices to buy back more shares. But many
companies are heading into their pre-earnings blackout period, when
they can't buy back stock because they know what their forthcoming
quarterly earnings will look like.
And companies remain nervous about the volatility in stock
prices, Mr. Silverblatt said. "It's hard to fight the market."
Write to Michael Rapoport at Michael.Rapoport@wsj.com and Theo
Francis at theo.francis@wsj.com
(END) Dow Jones Newswires
December 28, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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