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1 Value-Building Move Singapore’s Companies Can Learn From The World’s Most Valuable Company

iPhone maker Apple Inc. recently became the first ever company to carry a market capitalisation of more than US$700 billion.

Much of the company’s growth had come from its innovative spirit which has resulted in the release of one desirable tech gadget after another. In just five short years from 2009 to 2014, Apple has seen its revenue nearly quintuple from US$46.7 billion to US$199.8 billion; over the same period, Apple’s profits have surged from US$9.4 billion to US$44.5 billion.

But other than growing its business, Apple also displayed another value-building characteristic which companies in Singapore could learn from – and that is, buying back its own shares when they’re cheap.

Building value by buying shares

As you can see in the chart below, Apple’s valuation – represented by the simple PE (price-to-earnings) ratio – had started to shrink in 2010 and reached multi-year lows in 2012 and 2013. With pressure from prominent billionaire hedge-fund investors like David Einhorn and Carl Ichan, Apple started repurchasing its shares in earnest.

Apple's price-to-earnings (PE) ratio and share count from the start of 2007 till February 2015

Source: S&P Capital IQ

From a peak of 6.58 billion shares in the second half of 2013, Apple has seen its share count drop by 12% to 5.826 billion in its latest quarter. The shrinking share count has enabled Apple’s earnings per share-growth to outpace its net-income growth and had a hand to play in the doubling of Apple’s share price from US$64 at the start of June 2013 to US$127 today.

The local companies’ bad examples

Apple’s experience with share buybacks thus far suggests that local companies could take a leaf from Apple’s playbook and consider share buybacks as a way to return value to existing shareholders.

I say this because my own personal observations suggest that share buybacks do not seem to be a popular move amongst local companies.

For instance, during the Great Financial Crisis of 2008-09, when many shares were available for really low valuations, there were hardly any blue-chips which saw a meaningful reduction in share-count.

If we use Keppel Corporation Limited (SGX: BN4) as an example, the offshore engineering and property conglomerate actually saw its share count rise throughout the crisis despite its shares reaching really low valuations back then. You can see this in the chart below:

Keppel Corporation's price-to-book (PB) ratio and sharecount from the start of 2005 till February 2015

Source: S&P Capital IQ

With the current malaise in the price of oil helping to push Keppel Corp’s share price and valuation back down again, it might be a great time for the company to consider buying back meaningful amounts of its own shares if it thinks its business future is still bright.

A Fool’s take

There are two ways a company can use the cash it has to create value for shareholders: It can invest the cash and grow the business, or the company can use the cash to repurchase shares if they’re cheap.

Sometimes, when the company sees great investing opportunities at the same time when its shares become really cheap, it’s not always a clear-cut case as to which move makes the most sense for shareholders.

But, Apple’s experience has shown that share buybacks (of meaningful amounts) can be a powerful way to return value to shareholders and it’s a move that companies in Singapore may want to consider from time to time.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Apple.