Since its inception, Apple Inchas been synonymous with innovation, consistently releasing groundbreaking products that captivated audiences and led to exponential profit growthHowever, after 2013, the tide began to changeMarket saturation and intensifying competition became evident as the excitement surrounding new Apple products waned, consequently slowing down profit growth.

In a different context, this gradual profit deceleration might have triggered a prolonged slump in stock prices—especially in markets like China's A-shares, where dramatic downturns often accompany diminishing expectationsSuch scenarios frequently conjure dramatic narratives, tales that haunt traders and investors alike.

What is it, however, that allows Apple to break the mold of conventional corporate performance? Why has the recovery efforts of the stock price seemed almost impervious to the reduction in profit margins? The answer lies in a strategic financial maneuver: stock buybacks.

Beginning in 2013, Apple embarked on an ambitious journey of stock buybacks, accumulating a staggering total of $600 billion in shares repurchased by 2023. This initiative not only showcased the company's financial muscle but also rendered it the largest repurchaser of shares in the U.S

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stock market.

When stocks are bought back and subsequently retired, the total number of shares outstanding decreasesFor instance, Apple's outstanding shares dropped from 26.4 billion in 2012 to about 15.33 billion by 2023, a reduction of 1.11 billion shares, illustrating a significant 42% decline over the decade.

The company’s market capitalization is essentially a reflection of its expected future cash flowsIf profit stability is ensured, a decline in total shares naturally leads to an increase in stock price—the mathematical mechanics of market economics at play.

Consider the company’s Return on Equity (ROE), which soared from approximately 30% in 2013 to an astonishing 170% by 2023. Dissecting this through the DuPont analysis reveals that much of this remarkable growth can be attributed to increased leverage or equity multiplier, stemming from reduced equity and increased debt

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In simple terms, a significant portion of the money used for buybacks has been financed through loans.

This raises an intriguing question: Why would American corporations opt to take on debt for stock repurchases? Wouldn't one prefer the financial tranquility that comes with being debt-free, directing profits towards reducing liabilities instead?

For many executives, maintaining a high stock market value becomes a vital aspect of performance evaluation, or Key Performance Indicator (KPI). In an increasingly competitive landscape, instead of increasing production and capacity, many choose to invest in stock buybacks, sometimes even leveraging loans for this purpose, deliberately reducing the number of shares and inflating the stock price.

Moreover, a significant part of executives' compensation comes from equity incentives, creating a powerful link between stock performance and personal income

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If a company's upper management is awarded stock options priced at $12, any rise beyond that translates directly into substantial financial gain for them—every additional dollar in stock price means a $1 million increase in incomeConsequently, strengthening stock value becomes a personal priority within the corporate hierarchy.

This predilection for stock buybacks over dividend distributions has led many listed companies in the U.Sto favor repurchasing shares as a means of returning value to shareholders.

The fervor for stock buybacks in U.Scorporations has reached a remarkable intensityPowerhouses like Apple exhibit price-to-book ratios of around 60, while others, such as Boeing and McDonald’s, even show negative book valuations, starkly illustrating their financial approachThey have directed a substantial portion of their profits towards repurchases, creating an environment where their net assets appear diminished.

Boeing and McDonald’s are operationally profitable, yet their balance sheets reveal negative net assets

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What accounts for this paradox? The companies have allocated cash flows—which should typically fund depreciation reserves—back into their stock buyback programsIn conventional practices, funds accumulated from depreciation should be set aside, enabling renewal of fixed assets once existing structures reach obsolescenceInstead, both Boeing and McDonald’s have foregone this prudent financial practice.

This raises a critical concern: What happens when a company inevitably faces challenges without a financial safety net? Or what if the overemphasis on buybacks stifles innovative growth, allowing competitors to outstrip them?

Personally, I attribute the stagnation in innovative new technologies and revolutionary products at Apple to its heavy investment in stock buybacksThis phenomenon reflects the pressures inherent in a highly developed financial sector that sometimes marginalizes tangible productivity and innovation.

Underlying much of this corporate behavior is a pervasive sense of confidence rooted in market dominance and monopolistic conditions

Many executives appear to disregard potential competition, operating under the auspice that future profit will be steadyThis fosters an environment ripe for complacency, where efforts are concentrated on elevating stock prices through strategic buybacks rather than focusing on innovation or expansion.

It seems to me that the U.Smarket might be overindulging in buybacks, particularly those fueled by borrowed capitalThe wealthier companies seem more inclined to leverage debt, not for research and development but rather for repurchasing their own sharesSuch practices could explain recurring issues within companies like BoeingShould an economic downturn occur, a sudden stock price collapse could be imminent, burdening these corporations with significant obligations and insufficient cash reserves to weather the storm.

This perspective raises a considerable risk that could spell trouble in the future

However, given the current climate where the U.Sstock market is witness to soaring valuations, perhaps now is not the time for alarm.

In stark contrast to the fervor for buybacks seen in the U.S., companies listed on China's A-share market often disregard shareholder returns, exemplified by a ‘cash cow’ mentality that prioritizes capital accumulation over investor satisfaction.

Evidence of this can be seen in the persistent stagnation of the A-share index, which has remained around 3,000 points for years while total market capitalization has steadily risenWhen the Shanghai and Shenzhen exchanges peaked at about 6,000 points in 2007, combined market capitalization was below 33 trillion yuan; by 2015, at around 5,000 points, it neared 70 trillion, and by late 2024, with the index hovering around 3,200 points, the total market capitalization stands at approximately 85 trillion yuan without accounting for the Beijing Stock Exchange's figures.

Why does this apparent paradox exist—stagnant index points against growing market capitalization?

The answer lies in the dynamics of Initial Public Offerings (IPOs) and refinancing activities that continuously increase the number of shares outstanding, hence diluting shareholder equity

Unlike the U.Smarket—where stock buybacks serve to lessen the number of shares and enhance their value for existing shareholders—the A-share environment produces a different outcome.

Nonetheless, an encouraging trend emerges as more companies in China begin to engage in buybacks, particularly the internet giants who mirror their American counterpartsConsider Tencent, which recently committed to repurchasing shares worth 1.5 billion Hong Kong dollars daily following a drop in its stock price.

Such strategies, if maintained, will render shares increasingly scarce, likely leading to a surge in stock pricesThis trend among internet titans is a key rationale behind my optimistic long-term outlook for these companies.

As investors, it is prudent to learn from the experiences within the U.Sstock market, directing our focus toward monopolistic firms that demonstrate consistent profitability and the willingness to return value via dividends or share repurchases, as opposed to those companies that constantly seek to draw more capital from the market.