Apple’s Stock Market Scam

Apple beat Amazon and Google in the race to become the first trillion-dollar company in the U.S. on Thursday afternoon, when its stock hit $207.0425 a share. (It closed slightly higher.) It’s another milestone for what might be the most important company of the century thus far—one that’s even more impressive given that, 20 years ago, the company was being written off by nearly everyone and was on the verge of bankruptcy. But Apple survived both near-bankruptcy and the 2011 death of the company’s visionary founder, Steve Jobs. BusinessWeek marked the achievement with a bit of self-deprecation, tweeting its 1997 cover on “The Fall of An American Icon.”

The road to a trillion was paved with iPods, iPads, and iPhones—and, crucially, with the rollout of stores that NYU Stern School of Business professor Scott Galloway has described as “temples to the brand.” But Apple’s recent success on Wall Street isn’t due to its technological innovations or its sleek products. Instead, its stock has been juiced by a record-breaking number of buybacks, in which the company buys shares of its own stock, causing the supply to drop and the price to rise. In May, several months after Congress passed a massive corporate tax cut, Apple pledged $100 billion to stock buybacks in 2018—and is halfway to that goal. With $285 billion in cash on hand, it can afford to buy even more.

Viewed over a period of decades, a number of products and achievements played a role in getting Apple to where it is today. But as the company’s profit margins have shrunk, stock buybacks played a crucial role in getting Apple over the trillion-dollar finish line first. This asterisk should be something of a scandal. Apple is the poster child of the current spate of stock buybacks, which are starving investment and exacerbating inequality.

Though never banned outright, buybacks were largely curtailed in the wake of the Great Depression, thanks to rules that limited the ability of corporations to manipulate their own stock. As Vox explained earlier this week, even the threat of action largely kept buybacks from happening: “Companies knew that if they did a stock buyback, it could open them up to being accused by the Securities and Exchange Commission of having tried to manipulate their stock price, so most just didn’t.”

But as enforcement loosened, notably under the Reagan administration, buybacks began to increase. Now, they are omnipresent. A Roosevelt Institute study released on Tuesday found that corporations spent 60 percent of their net profits on stock buybacks between 2015-2017. Buybacks have continued to boom in the wake of the $1.5 trillion tax cut passed in December. J.P. Morgan estimates that $800 billion will be spent on buybacks in 2018, obliterating the previous record of $587 billion in 2007—a spree that ended when the economy collapsed.

The goal of buybacks is straightforward: They prop up share prices and reward shareholders by increasing the value of the piece of the company that they own. There is no conclusive evidence that buybacks boost share prices in the long term, but as The Motley Fool explains, “In the near term, the stock price may rise because shareholders know that a buyback will immediately boost earnings per share.” But buybacks may not be a particularly efficient way to prop up a share price. Earlier this month, The Wall Street Journal found that “57% of the more than 350 companies in the S&P 500 that bought back shares so far this year are trailing the index’s 3.2% increase.” (Apple’s stock, however was an exception—its shares had jumped 11 percent at the time of the report.) Nevertheless, given the amount of pressure that CEOs are under, and the fact that buybacks are applauded by the shareholders that profit from them, it’s no wonder that public companies in the U.S. have spent the majority of the windfall they received from last year’s tax cut buying back their own stock.

Because companies are spending so much on buybacks, they’re neglecting to invest in their workers or their products. “Stock buybacks undermine the productive capabilities of companies and their ability to generate new products that compete on the market, and this is going to, at some point, show up in stock price,” University of Massachusetts professor William Lazonick, who studies buybacks, told me. Buybacks, as the Roosevelt Institute study found, also keep wages low by giving money to shareholders rather than investing it in workers.

All of this is direct result of the short-term focus of the economy. “I attribute it a lot of it to the financialization of the economy,” Lazonick said. “Once you’re willing to spend two or three or four billion or more a year on buybacks for a large company, you start becoming much more willing to lay off 5,000 people even in a prosperous period to pump your stock price up.”

Tim Cook, Apple’s CEO, has argued that stock buybacks are ultimately good for the economy, because investors have to pay capital gains tax when they sell stock. This is something of a novel argument—it was made in a MarketWatch article published a few days earlier—but it’s not a particularly convincing one because most of the money would go directly to shareholders and executives, rather than the government or workers. Cook’s argument is also at odds with history. “Usually the conventional wisdom is the opposite,” John Cochrane, a senior fellow at the Hoover Institute, told Business Insider. “Stock buybacks started in the 1990s as a way of helping people to avoid taxes.”

Apple has pledged to add 20,000 jobs this year, but little is known about what exactly that means. Apple has increased its research and development spending over the past year, but the company is still only spending about five percent of total sales, a relatively low number, especially given the fierce competition between Apple, Amazon, Facebook, Google, and Microsoft. And consternation among investors about how that money is being spent—Apple’s biggest product of the last few years is the AirPod wireless headphones, which aren’t exactly the iPod, whatever Cook says—may be playing a role in Cook’s decision to buy back so much stock.

Apple is, by its own standards, in a bit of a lull in terms of profit margins. But the company has so much money on hand that it can afford to spend billions to keep investors happy, buying itself some time to develop the next breakthrough product. Ultimately, Apple crested the trillion-dollar mark not through technological brilliance, but stock manipulation. That’s hardly cause for popping the champagne.