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Financial engineering

As the current earnings season continues, we have seen a good number of companies reporting soft results on revenue growth, with significantly better numbers in net income, in general. One of the reasons for that has been the impact of share buybacks on earnings per share. In the chart below, you can see how Apple has reduced the number of shares from 26 billion to 15 billion over the last 10 years. That’s equivalent to $620 billion, higher than the market cap of 492 stocks in the S&P500. When the denominator in the earnings per share ratio is reduced, the overall number increases: you improve growth numbers, deliver a tax efficient dividend equivalent to shareholders and reduce the supply of shares, which is bullish, all this financed by debt, which at current rates, is still viable and profitable. The question is, how long can you continue to meaningfully reduce your capital base?

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