When most people think about a passive income portfolio, they immediately associate this with dividends. They are not wrong, but a common mistake I see people make is buying a company because of the dividend yield. There is another important way that companies can return capital back to you as an investor. Share buybacks, or stock repurchases, happen when a company buys back its own shares from the marketplace. In this article we will take a look at a couple of examples of companies whose stock price appreciation can be largely attributed to share buybacks.
The Bigger Picture
Apple, with its history of robust buybacks, provides a perfect example. Even Warren Buffet has stated that one of the biggest reasons he invested in Apple was because of the shares buyback policy.
We can see by looking at the shares outstanding over time that in the beginning when Apple was still a younger company, they increased the share’s count to pay their employees and raise funds. This is called dilution. Starting from 2013, after Tim Cook became CEO, a policy was instated to put any extra cash flow first into share buybacks. We can clearly see that since then the shares outstanding has been decreasing. Looking at the numbers, the impact this has on the shares that you own is immense.
Apple’s Earnings per share have increased dramatically by the company buying back these shares.
When a company buys back its shares, it often reflects its belief in its own future growth, impacting investor perception and stock value. Apple is not the only example of this. We can take a look at Visa and see similar results.
Conclusion
Share buybacks play a big role in corporate strategy and investor analysis. Through this article, I aim to provide a foundation for understanding and analyzing such financial maneuvers. While QuantTrend.io, the web app I developed, offers intuitive and user-friendly tools for visualizing key financial metrics — including those discussed in this article — and features helpful modals for clarifying complex concepts, I acknowledge that it’s one of many resources available.
Whether you choose to utilize QuantTrend.io or another platform, the key is to engage in thorough financial analysis. Doing so helps avoid common mistakes and enables more informed decision-making. Remember, the cornerstone of successful investing is not just having the right tools but also the knowledge and understanding of how to use them effectively.
General Disclaimer: I am not a financial adviser. The information provided in this article is for general information only and should not be taken as professional advice. There are risks involved with stock market investing and consumers should not act upon the content or information found here without first seeking advice from an accountant, financial planner, lawyer or other professional. Consumers should always research companies individually and define a strategy before making decisions. I am not liable for any loss incurred, arising from the use of, or reliance on, the information provided by this article.
