Apple recently became the first company with a trillion-dollar valuation. This is a company with essentially one product that has a decelerating growth rate and some services to go along with it.
Earlier in the year Apple CEO, Tim Cook, announced a $100 billion buyback (on top of the $10 billion in dividends) which, at the time was about 15% of its stock. From there it was a quick ride to $1 trillion and a big metaphorical pecker contest win for Tim Cook who has done nothing else notable as head of the world's 'most valuable' company. This guy is sitting on $250 billion in capital and used half of that to buy a $1 trillion valuation. Great.... I guess?
But I'm not so interested in the trillion-dollar valuation. It is a psychological marker that has no consequence. What I want to discuss is the $100 billion buyback. Most of us understand the market impact of the massive buybacks that have been taking place over the past decade. Take a bunch of money; pay market speculators to buy your stock and the stock price will go up. Essentially companies have been attracting shareholders with direct cash payments rather than superior operational performance.
Ok, fair enough. So the market is no longer a measure of productive capital allocation represented by stock performance but a mechanism to drive share price higher through direct capital injection. Got it. And while that reality is cause for concern given the longer-term implications of certain implosion when the money for buybacks runs out that's still not what I'm interested in discussing here.
The $100 billion buyback is a look to the history books of tomorrow. It tells a story of this era. It will be used as a parable to explain what went wrong.
Here is a company whose one product is so unaffordable (and getting more-so as per it's latest 10-Q, with revenue growth coming only by way of price increase) that its customers no longer own but 'rent-to-own' it through monthly payments. And to ensure it is never owned, Apple, admittedly, began shutting the battery down before the two-year payment period was up forcing its customers to enter a new payment plan. They call it the two-year 'upgrade'.
And so you have a large portion of the population using a product that for all intents and purposes is necessary to efficiently navigate the day to day of the modern world. But using this product now means paying a monthly rent. More than 80% of iPhones are under a monthly payment plan that actually makes the already unaffordable device 33% more expensive after the financing costs are applied ($935 after financing vs. $700 purchased).
Think about the implication. A large portion of society is now paying a monthly rent to Apple (and its distributors) and will do so forever as they enter new payment plans every two years. This has allowed Apple to extract and amass huge piles of cash from society, $250 billion to be clear. Apple then gifts $100 billion to shareholders, guys like Warren Buffet, who through Berkshire owns 5% of Apple. Apple has become the modern day Sheriff of Nottingham.
If you want to understand income disparity and wealth gap look no further than Apple's $110 billion cash distribution this year. Extracting massive amounts of income from society, most of whom have less than $500 in savings, and gifting those rents to society's most fortunate few. I don't mean to single out Apple either. This shortsighted and incredibly destructive practice of nonsensical cash distributions is ubiquitous across the S&P and thus this microeconomic strategy has become a macroeconomic death spiral.
Then you have the PhD's that simply cannot understand why we have the lowest long-term economic growth rate in history (10 year moving average GDP growth rate of around 1.8%). Well chaps, when the S&P companies are pulling trillions out of the economy each year and stuffing it into the financial markets, the economy will slow and the markets will accelerate. Sound familiar?
Rewarding this model of corporatism is where the responsibility falls on us the consumer. Not understanding the implications of our spending patterns is the ignorance that allows the disparity. At Spendindie we encourage society to take a more cognitive role in reshaping a system currently designed by and for the few. As consumers we hold a tremendous amount of potential economic power.
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