BRK/AAPL: Double Buybacks

Stocks A to Z
1

Thought this article was insightful:

"This article, therefore, wants to examine an aspect that has been largely neglected thus far to my knowledge - the effects of their (BRK/AAPL) double buybacks. Existing articles tend to look at their buybacks separately (including my own past articles). And the thesis of this article is that such separate analyses underestimate the potency of their buybacks given BRK’s enormous AAPL position.

You will see that the double buybacks are more overpowering than on the surface. Simple math will show that the combined impacts are larger than 20% if each of them buys back 10% of their own shares. It is a classical example of 1+1>2, which can work to the advantage of BRK shareholders or investors who want to own Apple shares indirectly from Berkshire."

https://seekingalpha.com/article/4533634-berkshire-hathaway-…

5 Likes
2

"This article, therefore, wants to examine an aspect that has been largely neglected thus far to my knowledge - the effects of their (BRK/AAPL) double buybacks. Existing articles tend to look at their buybacks separately (including my own past articles). And the thesis of this article is that such separate analyses underestimate the potency of their buybacks given BRK’s enormous AAPL position.

Thanks for sharing, BreckHutHigh. I do wish, however, that the author of the article had gone back to the 2020 Berkshire letter (https://berkshirehathaway.com/2020ar/2020ar.pdf). They would see that Warren Buffett himself already examined the effects of the Berkshire/Apple “double buybacks” (especially the bolded paragraph):

"Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I’m referencing the investment held in Berkshire’s general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple.

Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position.

Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.

But that’s far from all of the good news. Because we also repurchased Berkshire shares during the 2 1/2 years, you now indirectly own a full 10% more of Apple’s assets and future earnings than you did in July 2018.

This agreeable dynamic continues. Berkshire has repurchased more shares since yearend and is likely to further reduce its share count in the future. Apple has publicly stated an intention to repurchase its shares as well. As these reductions occur, Berkshire shareholders will not only own a greater interest in our insurance group and in BNSF and BHE, but will also find their indirect ownership of Apple increasing as well.

The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses.

And as a sultry Mae West assured us: ‘Too much of a good thing can be . . . wonderful.’"

15 Likes
3

” They would see that Warren Buffett himself already examined the effects of the Berkshire/Apple “double buybacks” (especially the bolded paragraph):

Thanks for the reminder. I like being reminded why I have an over sized BRK position.

I just wish Warren had been buying back more BRK and AAPL during the recent down draft. Have to infer he believes there’s a high probability of better prices coming in the future.

4

You will see that the double buybacks are more overpowering than on the surface. Simple math will show that the combined impacts are larger than 20% if each of them buys back 10% of their own shares. It is a classical example of 1+1>2, which can work to the advantage of BRK shareholders or investors who want to own Apple shares indirectly from Berkshire.

They make it seem much more complicated than it is. If Apple buys back 10% of its shares, then Berkshire shareholders now own more (although these shares are still only worth about the same amount, if Apple shares are fairly priced.) And if Berkshire buys back 10% of its shares, then this further increases the number of Apple shares an ongoing Berkshire shareholder owns. The combined effect is multiplicative, not additive, so it ends up being like Apple buying back 21% of its shares (110%*110%=121%), not 20%.

This additive/multiplicative duality is no different from compounding: if Apple shares go up by 10% for 2 years, they are now worth 21% more, not 20% more.

This should not be dramatic news for shareholders. What is important, is the extent to which the buybacks happen below fair value, or above. If, like Apple, the shares are being repurchased without regard to price (contrary to Berkshire’s behaviour), we may end up overpaying for these Apple shares, even if the buybacks are a good idea on the Berkshire side.

Buybacks are not always good, and compound buybacks like the Berkshire/Apple situation only add value, above and beyond simple buybacks, if they are priced properly on both sides. Since there’s no evidence that Apple gets this basic idea, I think I will be able to contain my enthusiasm…

dtb

11 Likes
5

“This should not be dramatic news for shareholders. What is important, is the extent to which the buybacks happen below fair value, or above. If, like Apple, the shares are being repurchased without regard to price (contrary to Berkshire’s behaviour), we may end up overpaying for these Apple shares, even if the buybacks are a good idea on the Berkshire side.”

I agree and appreciate you and Breck’s points, but it has worked out pretty well for Apple owners over the years shrinking 40% share count in recent years when many said they were overpaying along the way. They continue to amaze and widen the moat and ecosystem. I cringe when I hear they are potentially allocating into autonomous vehicles and things not particularly in their wheelhouse. WEB loves getting a free and bigger slice of the compounding earnings pie, don’t we all?! BRK and AAPL are my 1/2 individual holdings, so very happy. Pleased GOOGL and MSFT are catching the drift as well just in time though for the darn buyback tax!

6

I cringe when I hear Apple is potentially allocating into autonomous vehicles and things not particularly in their wheelhouse.

Umm, potentially? They’ve reportedly had 5,000 people working on project Titan for many years now.

And if you own Apple you should be very excited they’re working on an electric car project. For two reasons.

First, the intersection of hardware, software, and services is Apple’s wheelhouse.

Second, it’s a big enough market that it could meaningfully move the needle on a $3 trillion company.

1 Like
7

I agree and appreciate you and Breck’s points, but it has worked out pretty well for Apple owners over the years shrinking 40% share count in recent years when many said they were overpaying along the way. They continue to amaze and widen the moat and ecosystem.

Fair enough - the Apple buybacks, which happened at what seemed to be quite high prices, have turned out well. However, I wouldn’t count on that always working. I would be much happier to see Apple halt their buybacks once prices got over some level, or at least recognize publicly that there might be such a level where continuing buybacks would no longer make sense.

dtb

2 Likes
8

“However, I wouldn’t count on that always working. I would be much happier to see Apple halt their buybacks once prices got over some level, or at least recognize publicly that there might be such a level where continuing buybacks would no longer make sense.”

Agree! Not many CEOs have the clarity of WEB and know when to tap the brake. Cook is incredible at keeping Apple on the right track and in the headlines and with such enthusiasm. He was at the BRK meeting and maybe he will exhibit quality buyback discipline. Imagine WEB does not hold investee CEOs to his own high standards and figures there are far worse ways to allocate.