The Strategy of the Buyback

Apple has scheduled a massive stock buyback for later this month, with the expectation that the company will repurchase about $10 billion worth of its own shares. This is supposed to be an encouraging sign for stockholders. It's not just that Apple is confident enough in its future that it wants to own more of its own stock, but by removing those shares from the marketplace, the purchase should help buoy the price.

 

But it doesn’t always work that way. Like many individual investors, companies are all too often willing to buy their own stock when prices are high, and sell it when prices are low. In the recent past, stock buybacks by the S&P 500 peaked at $172 billion in the third quarter of 2007 – when the market was at its peak – and reached a trough at $24 billion in the second quarter of 2009, just after the market had hit bottom.

 

Consider the plight of Best Buy, which has bought back 98 million of its own shares since April 2010, according to the Wall Street Journal’s CFO Report. It paid about $30 a share for that stock, but it’s now trading just under $20, which means the buyback program has cost Best Buy around $1.2 billion.