This Tech Giant Is a Stock Buyback Leader. Here's What That Means for Investors.

You've probably seen articles about stock buybacks in the news. Also known as share repurchases, they occur when companies purchase shares of their stock on the market and then retire them, thereby reducing the total number of shares outstanding.

It is one of the most common ways companies use their profits to create value for their shareholders. Lowering the share count increases the company's per-share revenue and earnings, which can drive the stock price higher.

The Motley Fool studied which companies spend the most money on buybacks. Several "Magnificent Seven" companies led the way in 2024.

Apple (NASDAQ: AAPL) topped the list. The iPhone maker has spent over $695 billion on buybacks over the past decade. That's miles ahead of every other company.

What has the company's buyback strategy meant to investors? Here is what you need to know.

Buybacks have vastly improved Apple's returns over the past decade

Apple has outperformed the S&P 500 over the past decade, and its substantial stock buybacks are a key reason.

Its diluted share count was 5.8 billion at the end of its fiscal year 2015. The company conducted a 4-for-1 stock split in 2020, so that translates to about 23.2 billion shares in today's terms.

Apple ended its fiscal year 2024 with approximately 15.4 billion shares. That means all those buybacks over the past decade reduced the company's diluted share count by 33.5%.

In 2024, it reported net income of $93.7 billion, resulting in diluted earnings per share (EPS) of $6.08. Suppose those buybacks never happened. In that scenario, 2024 diluted earnings per share would have been $4.04. The stock price would be far lower today without those buybacks.

The combination of growth and share repurchases has made Apple a lucrative investment over the years. Buybacks can still drive EPS higher, even if net income doesn't grow.

Why Apple can afford more buybacks than most companies

Not every company can or should buy back as much stock as Apple has. Its world-class business model has some rare traits.

For starters, it has a vast global supply chain that enables it to manufacture its iPhones and other hardware products at low costs. Then, its brand power is so strong that it can turn around and sell these products at high margins. The company complements this by generating more high-margin revenue throughout its ecosystem, from subscription services and App Store fees.

Apple turns roughly a quarter of each revenue dollar into free cash flow and generates a return of more than 56% on the capital it invests. That's impressive on its own, but it's on another level when you're doing nearly $400 billion in annual revenue:

Perhaps it's no wonder that multibillionaire and legendary investor Warren Buffett is so fond of Apple. Buffett is also the longtime CEO of the holding company Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), and Apple is the largest holding in its portfolio. He has called it the best business Berkshire owns.

How Apple might get into trouble if it depends too heavily on buybacks

As great as Apple is, investors shouldn't take it for granted, and neither should the company's management.

Buybacks alone are not a sufficient reason for investing in a company, and Apple has not been immune to criticism. Organic growth has slowed over the past couple of years, and the company has been late in rolling out artificial intelligence features for its devices. It becomes fair to wonder whether management got complacent or should have invested more heavily in research and development.

It's not that Apple can't regain its form, but it shows that even a world-class business and buyback juggernaut must continually push and execute to stay ahead.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.