Apple Inc (AAPL) enjoyed stellar growth over the past 12 months, jumping more than 50%.
But is that due to solid operating performance or window-dressing, with almost $140 billion of stock buybacks in the last two years?
Free cash flow — operating cash flow less stock compensation and investment in plant and equipment — has been falling since 2015.
And the company has depleted its cash reserves over the last two years, to fund stock buybacks. The graph below depicts the change in Apple’s net cash position (cash plus marketable securities less debt).
So why the management enthusiasm for stock buybacks?
Is the stock a good investment? No. Free cash flow per share has barely lifted since 2015 despite $237.5 billion used to repurchase 1144 million shares.
Apple have returned surplus cash to stockholders in the most tax-efficient way possible, by buying back stock rather than paying dividends. The added bonus is the reduced share count which gooses up earnings per share growth and return on equity.
Investors in turn get excited and run up earnings multiples. The current price/free cash flow ratio of 23.2 exceeds that of the heady growth days up to 2015.
The stock keeps climbing, supported by buybacks and rosy EPS projections. The problem for Apple is when they run out of cash, or exceed reasonable debt levels, then the band will stop playing and those heady multiples are likely to come crashing down to earth.
It’s not only Apple that’s doing this. The entire S&P 500 is distributing more by way of buybacks and dividends than it makes in earnings, eating into reserves meant to fund new investment.
The result is likely to be low growth and even more precarious earnings multiples.