MW Apple cut share buybacks and its stock took the hit. Here's what sellers are missing.

By Mark Hulbert

Apple shares tend to perform better when stock-buyback activity is below average

Apple's past share repurchases have not been particularly well-timed.

Investors unfairly punished Apple's stock last week after the company announced it was reducing its buyback program to $100 billion from $110 billion.

Apple shares $(AAPL)$ dropped 5% in aftermarket trading in the wake of that announcement. Trimming the buyback program was not the sole cause of the drop, but it was widely cited as a major factor.

Reducing a share-buyback program is not a good reason to punish Apple's stock because the company's past share repurchases have not been particularly well-timed. As you can see from the chart below, Apple shares on average perform better when stock-buyback activity is below average.

Because the differences plotted in the chart are not significant at the 95% confidence level that statisticians often use when assessing whether a pattern is significant, it would be going too far to argue that investors should welcome Apple's reduced buyback program. But there's also no support in the data to punish the stock.

Moreover, Apple's experience is hardly unique. The average company is a lousy market timer when deciding to repurchase its shares. Management tends to buy back more shares when prices are high than when low.

As William Bernstein of EfficientFrontier.com noted in an email: "Companies execute buybacks when the sky is blue and they have plenty of spare cash, and hoard cash when the sky turns dark, when the best bargains can be had."

Furthermore, management sometimes goes out of its way to be a bad market timer when planning share repurchases. That will be the case, for example, when managers are about to exercise some of the stock options they have been granted as part of their compensation. At such times, they will have an incentive to boost their companies' share prices as much as possible, thereby making their options more valuable. (For the record, I have no information suggesting that Apple's management actually acted on such incentives.)

One way to gauge the market-timing potential of repurchases is with the S&P 500 Buyback Index, which is constructed to own the 100 stocks within the S&P 500 SPX with the highest buyback ratios. (A company's buyback ratio is the dollar amount it has spent on repurchases over the trailing four quarters, expressed as a percentage of the company's market cap.) As you can see from the chart below, this index has lagged the S&P 500 over the past decade.

The bottom line: Buyback activity is closer to being a contrarian indicator than a trend-following one. If anything, Apple's trimmed buyback program is more of a good omen than a bad one for the company's long-term performance.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

Also read: Apple's $100 billion buyback disappointed some. Here's where it ranks historically.

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-Mark Hulbert

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May 07, 2025 09:32 ET (13:32 GMT)

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