By William Lazonick, Professor of Economics, University of Massachusetts Lowell. Originally published at the Institute for New Economic Thinking website
The enormous revenues and profits flowing from Apple’s innovative products, the iPhone in particular, get primary credit for enabling the company to be the first in history to reach a trillion-dollar market capitalization. That financial achievement, attained on August 2, 2018, represented a tenfold increase in stock market value since mid-2007 and a doubling of the level reached in March 2012. But also driving Apple’s booming stock price has been the company’s record-breaking largess in distributing corporate cash to its shareholders.
Apple has just released its financial results for the fourth quarter of 2018, revealing the full extent of its record-setting stock buybacks in fiscal year 2018. From the last quarter of calendar year 2012 through September 29, 2018, under its inaptly-named “Capital Return Program,” Apple spent $239.0 billion buying back its own stock. In addition, the company paid out $74.4 billion to shareholders as dividends. Prior to 2018, Apple had set the record for buybacks by a company in a fiscal year, with $45 billion in 2014 (year ending September 27). During fiscal year 2018, Apple far surpassed that figure with $73 billion lavished on buybacks, representing 123% of its net income.
Apple’s “Capital Return Program” is an ideologically laden name for these distributions of corporate cash to shareholders that has nothing to do with returning capital. First, you can’t “return” something to a party that never gave you anything. The only time in its history that Apple actually raised funds from public shareholders was its initial public offering in 1980, which yielded $97 million for the company. Second, in distributing cash to shareholders, Apple is not giving them “capital.” It’s just transferring cash that may be used for a multitude of purposes, ranging from household consumption to building the war chests of hedge-fund activists, augmenting their power to engage in predatory value extraction.
Apple has become the most glaring example of how, captured by the ideology that a company should be run to “maximize shareholder value,” U.S. business corporations have been handing over the gains of innovative enterprise to public shareholders far in excess of their contributions to the processes of value creation. Losing out are households, whose tax dollars fund the government investments in infrastructure and knowledge that a company like Apple requires, and Apple’s employees, whose skills and efforts have generated the innovative products that have made the firm the richest in the world.
Contrary to shareholder ideology, the stock market is not an institution whose function is raising cash for corporations to invest in productive capabilities. Rather, the financial role of the stock market has been to enable private equity investors to “exit,” as venture capitalists put it, investments they have made in a firm’s processes and products. The listing of a firm on a liquid stock market enables households, governments, and businesses to include its publicly listed shares in their portfolios of financial investments without actually investing in that firm’s productive capabilities. Compared with those financiers, taxpayers, and employees whose funds and efforts are committed to value-creating investments in productive capabilities, stock market traders always have the option of mitigating their risk at any time by selling shares to lock in financial gains or stem financial losses.
Take, for example, the $3.6 billion in Apple shares that “shareholder-activist” Carl Icahn added to his financial portfolio between July 2013 and January 2014. In research supported by the Institute for New Economic Thinking, my colleagues and I have analyzed how Icahn used his accumulated wealth, public visibility, tweeted-out hype, and personal influence on Apple’s management to help drive up the price of the company’s stock—while, apparently, exploiting privileged access to nonpublic information in choosing when to sell his Apple shares. In 2014 and 2015, as Icahn continued to hold those shares, the company did $80.3 billion in buybacks, helping to lift the stock price to new heights. Aided by this record-setting exercise in value extraction, Icahn was able to add $2 billion to his wealth by March 31, 2016, by which time he had sold all his Apple shares. In realizing this bonanza, Icahn made no contribution whatsoever to Apple’s value-creating capabilities.
While Icahn was selling Apple stock in the first quarter of 2016, “patient-capitalist” Warren Buffett was buying it. Over the previous decades, the “Oracle of Omaha” had become one of the world’s wealthiest people as chairman, CEO, and major shareholder of Berkshire Hathaway, a financial and industrial conglomerate that he has led since 1964. In a recent interview, Buffett proffered the words of wisdom that “the reason stocks are worth a whole lot more than they were 20 years ago, or 50 years ago, or a hundred years ago, is that companies have ploughed back part of the earnings.” In contrast to the proclivity of corporate raiders such as Icahn for what I call a “downsize-and-distribute” business model, Buffett’s business approach at Berkshire has been to “retain-and-reinvest.”
Retaining its profits for reinvestment in the growth of the company, Berkshire has not paid a dividend since 1967. Its repurchases were minimal: $1.2 million in stock between 1976 and 1978, $67 million in 2011, and, its only significant buyback, $1.3 billion (9% of net income) in 2012 from the estateof a long-term shareholder. By retaining profits and reinvesting in productive capabilities, in 2017 Berkshire’s revenues had grown to $242 billion—placing it third on the Fortune 500list, just behind Exxon Mobil and just ahead of Apple—and its constituent businesses employed 377,291 people, up from 38,000 on 1997 and 233,000 in 2007. In August 2018, Buffett said that Berkshire had repurchased “a little” stockunder a new authorization program, and with the release of third-quarter earnings on November 3, revealed that amount to be $928 million.
Between January 2016 and June 2018, Buffett used Berkshire’s ample cash reserves to accumulate 252 million Apple shares, representing 5.1% of Apple shares outstanding on June 30, 2018, at an estimated purchase price of $36.1 billion. In so doing, Berkshire became Apple’s third-largest shareholder, behind Vanguard (7.1%) and Blackrock (6.4%). If Buffett had sold Berkshire’s entire Apple stake on that date, his company would have netted a market gain of $10.4 billion, along with the $734 million in dividends that Apple had paid on Berkshire’s shares over those 30 months.
Just after the announcement in May 2018 that Buffett had purchased an additional 74 million Apple shares, interviewer David Rubenstein asked Apple CEO Tim Cook: “Are you pleased to have him as your shareholder?” Cook responded: “I’m overjoyed. I’m thrilled. Warren is focused on the long term, so we’re in sync. It’s the way we run the company. It’s the way he invests. So, yeah, I could not be happier.”
Rubenstein then asked Cook what Apple planned to do with its $260 billion in cash, most of it newly repatriated rom offshore tax havens under tax incentivesprovided by the 2017 Tax Cuts and Jobs Act. Cook’s answer: “We’re going to create a new site, a new campus within the United States. We’re going to hire 20,000 people. We’re going to spend $30 billion in capital expenditure over the next several years. Number one, we’re investing, and investing a ton, in this country. We’re also going to buy some of our stock, as we view our stock as a good value.”
With Apple repurchasing $73 billion in fiscal 2018 at record stock prices, Cook’s statement that Apple was going to buy “some stock” at “a good value” was clearly disingenuous. Perhaps that is why the Apple CEO followed with a feeble attempt to justify Apple’s stock buybacks, telling Rubenstein that Apple’s repurchases were “good for the economy as well because if people sell stock they pay taxes on their gains.” Given the enormous tax breaks that corporations and the richest households have received under the Tax Cuts and Jobs Act, Cook’s ludicrous defense of Apple’s repurchases is in effect an admission that Apple’s stock buybacks are indefensible.
As for Buffett, in an interview just after the May 2018 announcement of Berkshire’s latest increase in its Apple shareholding, he flatly contradicted his reputation as the quintessential patient capitalist. Buffett enthused: “I’m delighted to see [Apple] repurchasing shares. I love the idea of having our 5 percent, or whatever it is, maybe grow to 6 or 7 percent without our laying out a dime.” Move over, King Icahn. Having the Oracle of Omaha as one of its largest shareholders has not in the least stemmed Apple’s voracious appetite for bingeing on its own shares. From April 1, 2016, when Icahn no longer held Apple shares, through June 2018, with Berkshire now Apple’s third-largest shareholder, Apple did $102.7 billion in buybacks, equal to 92.9% of profits. That’s compared with $87.1 billion (78.3% of profits) in buybacks over 27 months from October 2013 when Icahn was holding his Apple stake.
As I put it in a 2014 Harvard Business Reviewarticle, “Profits Without Prosperity,” stock buybacks manipulate the market and leave most Americans worse off. With business leaders like Cook and Buffett expressing a passion for repurchases, it is no wonder that income inequality runs rampant in the United States, while well-paid and stable employment opportunities disappear. Four years ago, after Icahn had written an open letter to Cook demanding that Apple ramp up its buyback activity, I posted my own open letter to the Apple CEO on the Harvard Business Reviewblog, with suggestions on how, instead of doing buybacks, Apple’s management could focus its attention on improving the remuneration and opportunities of its employees, as well as on social investments and innovation. All of my suggestions in that letter are entirely consistent with Cook’s repeated claims that Apple is all about investing in innovation for the long term.
Even after all the buybacks, Apple’s current cash flows position it to do far more than it is doing to reward its real value creators—taxpayers and employees—while investing for the future. In continuing its massive buybacks, however, Apple is, with Buffett’s enthusiastic approval, reinforcing the destructive ideology that all of its retained earnings and future profits belong to shareholders, while, with stock price as the metric of superior corporate performance, increasing the pressure on all other U.S. companies to engage in stock-price manipulation by doing stock buybacks.
Instead Apple should be, and could be, increasing the pressure on other U.S. companies to improve employee remuneration and career opportunities as well as provide corporate support for government investment in the infrastructure and knowledge that a prosperous economy requires. Government regulation is needed to give would-be patient capitalists a helping hand. A ban on manipulative stock buybacks would be a critical step in putting corporate profits to work for a thriving American middle class.