Investors were ecstatic on Friday as Apple’s stock surged 6% following the release of better-than-expected fiscal second-quarter results and the announcement of the largest stock buyback program in U.S. corporate history. With Apple committing to a $110 billion stock buyback program, many are optimistic about the potential impact on the stock price.
However, it’s important to note that simply initiating a massive buyback program doesn’t always guarantee a significant boost in stock performance. Dan Nathan, principal of RiskReversal Advisors, pointed out that Apple has already been actively buying back its shares over the past few years, yet the stock has still been underperforming compared to its Big Tech rivals. Despite Friday’s rally, Apple’s stock is still down for the year.
This brings to light the discussion on whether using excess cash for buybacks is the best use of funds for a company like Apple. Some investors may argue that the cash sitting on the balance sheet could potentially be earning a higher return elsewhere rather than being used to repurchase shares. This sentiment is evident in the underperformance of the Invesco Buyback Achievers ETF (PKW), which includes companies that have reduced their outstanding shares by at least 5% over the past 12 months.
It’s clear that the effectiveness of buyback programs in driving stock performance varies from company to company. While buybacks can create additional buying pressure and increase earnings per share, it’s not a foolproof strategy for success in the stock market. Investors should consider various factors beyond just the announcement of a buyback program when evaluating the potential impact on a company’s stock price.
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