For the past half decade, Apple greatly enriched its shareholders by shrewdly deploying buybacks. But the approach that was a splendid gambit when its shares were cheap is looking like a rigid, questionable strategy now that they’re far from a bargain.

At Berkshire Hathaway's virtual shareholder meeting on May 2, Warren Buffett delivered a staunch defense of share buybacks. “It’s very politically correct to be against buybacks,” he declared. The federal COVID-19 relief programs, Buffett noted, ban recipients of loans and grants from repurchasing shares, underscoring how “fashionable” it’s become to join “the cry about how terrible it is that companies have bought back stock.” But Buffett reprised his oft-stated conviction that what’s become the most popular practice of returning cash to investors is valuable and responsible because it allows them to build their ownership stakes without being forced to take their share of annual profits in taxable dividends, “whether they want them or not.”

Buffett added an important proviso: Repurchases should be opportunistic, not routine. “Companies should buy [stock] back below what they think it’s worth,” he said. “If the stock is selling below what it’s worth, it’s a big mistake not to buy the stock.” Buffett cautioned that announcing a multibillion buyback program for a given year can lock management into loading up on shares even if they’re overpriced. “You hear about all these programs where we’re going to spend $5 billion or $10 billion, and that’s like saying you’re buying some business this year for $5 billion or $10 billion and not knowing what you’re going to get for the money,” Buffett warned.

Buffett’s Berkshire Hathaway holds $70 billion in Apple stock, amounting to around one-quarter of its total portfolio. Berkshire has profited handsomely from the iPhone-maker’s policy of giant annual repurchases, the likes of which corporate America has never seen, and Buffett is a big fan of CEO Tim Cook and its top management. But Apple’s pledge to keep repurchases rolling when its stock hovers at lofty valuations makes it logical to apply Buffett’s standard and pose the question: Is the king of buybacks so infatuated with its own shares that it will keep buying at any price?

In the past, Apple’s buyback strategy has paid off big-time

In its seond-quarter earnings release on April 30, Apple announced that it’s adding $50 billion to its repurchase program, bringing the total available to $90.5 billion. It’s hardly surprising that Apple richly replenished the buyback pool: Over the past half decade, repurchases have long been its strongest lever for rewarding shareholders.

Over fiscal years starting on Oct. 1, 2014 (Apple’s fiscal year ends Sept. 30) through March 2020, Apple generated $321 billion in free cash flow and channeled $278 billion, or 86%, into repurchases. That policy proved a big success. Apple paid an average price of $160 per share, a 45% discount to its early May level of $291. Over those five-and-a-half years, Apple has shrunk the number of shares outstanding by over 26%, from 5.865 to 4.334 billion. Shareholders who’ve owned Apple since 2014 have seen their stake in its profits grow by more than a quarter thanks to that regular program of buybacks. That’s a case study in what Buffett calls the virtue of buybacks.

Buybacks were particularly essential for Apple, because its profits, though gigantic, barely grew. From 2015 to 2019, Apple’s earnings budged less than 4% from $53.4 billion to $55.3 billion. Yet its earnings per share jumped almost 29%. It was the big buybacks that by lowering the float by 25% drove roughly 90% of the full increase in EPS. For fiscal year 2020, repurchases once again should account for almost all of any rise in EPS, because earnings are likely to stay flat at best. Apple disclosed that problems with its supply chain in China will delay the launch of its 5G product, the iPhone 12, and COVID-19’s hit to consumer spending is slowing sales of pricey flagship iPhones.

The market radically repriced Apple last year

Until recently, Apple was garnering outsize benefits because it was buying cheap. From October 2014 to mid-2019, its price-to-earnings multiple averaged around 16. In effect, investors were valuing Apple as what its numbers portrayed, a wondrous machine that generated incredible amounts of cash but barely grew. But in July of last year, Apple seemed to take on new glamour as part of the FAANG club that includes Facebook, Amazon, Netflix and Google, all go-go growth stocks. Suddenly, investors started pricing Apple a lot less like an old reliable, and more like a swaggering FAANG. From summer 2019 to the market peak in February, its shares jumped from under $200 to $325, a 65% climb that handily beat the S&P 500.

Amazingly, the coronavirus crisis barely dimmed the magic. On May 4, Apple shares stood at $292, a retreat of just 10% since the crisis struck. Over the period of this epic run-up, Apple’s net earnings weren’t ascending, they were flat as usual. Its stock price suddenly uncoupled from its underlying profits, and took flight. Even now, its P/E sits at 23, 44% higher than its five-year average prior to the takeoff.

Put simply, in a matter of months, investors recast Apple as a growth stock, then when the virus crisis struck, recast it again as the safest of safe havens in the storm of the century. Suddenly, buybacks that looked like a no-brainer when Apple was a steal look a lot more questionable at its new, premium valuation.

The big rise in price didn't slow Apple's campaign. In the six months from October through March, it spent $38.5 billion buying back shares at $285, almost twice the $147 average for the previous five years.

The big run-up makes buybacks far less valuable

When Apple repurchased a staggering $73 billion in stock during 2018, it was paying a P/E of around 16. So for every dollar spent, Apple raised EPS by 6.25¢, or 6.25%. The deals were even sweeter at multiples of 14 (plus 7.1% for EPS) in 2015 and 12 (plus 8.3%) in 2016.

But at to today’s P/E of 23, Apple’s investors will only garner EPS gains of 4.34% for each dollar of buybacks. Now, Apple is facing the challenge Buffett posed for all buybacks. Is Apple stock really worth more than $292 per share? For years, Apple’s P/E lagged far behind the S&P average; today, its multiple of 23 floats 15% above the index’s benchmark of 20. At these prices, are buybacks still a good deal?

Is going on autopilot with buybacks the best option?

Apple’s elevated price means it should be questioning whether buybacks should remain the prized package for its immense earnings.

The best option would be the one Apple apparently isn’t able to exploit: reinvesting heavily in innovative, high-growth products.

Between buybacks and dividends, Apple has long been returning over 100% of its free cash flow to investors. That choice suggests that it lacks new opportunities to invest significant portions of its free cash flow in profitable new products that would drive profits to fresh heights. “Apple is generating 17% returns on the cash already invested in its businesses,” says Jack Ciesielski, a portfolio manager and leading accounting expert. “The best solution would be finding new investments that would produce returns anywhere near those levels. New projects that return, say 15%, would generate strong earnings growth. They’re gushing cash on a quarterly basis, but can’t make a good return by reinvesting it.”

Today, Apple distributes around 25% of its earnings in dividends for a yield of just 1.1%, maintaining a conservative payout rate. Of course, we don’t know if Apple has big plans for breakthroughs that aren’t yet public, and sets the ratio low to maintain flexibility. We’ll assume that Apple’s superb management isn’t reinvesting much for a sound reason: It’s tough to invent the next iPhone or iPad. So the choices distill to how much to hoard in cash, how much to pay out in dividends, and how much to keep plowing into Apple’s favorite channel, buying back stock.

Apple does have plenty of room to comfortably raise its dividend. By lifting its payout ratio from 25% to 35%, it would better reward investors looking for current income. Buffett frequently says that companies should serve both shareholders looking to build their ownership via buybacks, and those seeking steady cash distributions. But Apple has no good choices for the other 65% of its cash flow. If it eschews buybacks and accumulates cash, it will garner tiny returns parking that burgeoning stockpile in the likes of Treasuries.

Nor is continuing to repurchase gigantic blocks of stock a great option. Say Apple spends $70 billion in the next four quarters on buybacks at a price of $290, and months later, its P/E reverts from 23 to 16. It will have effectively overpaid by 45%, and wasted $30 billion versus what it would have spent if it had waited for what’s traditionally been fair value.

As Ciesielski points out, buying in shares, even at high prices, is preferable to “empire building” by overpaying for acquisitions, a pitfall Apple has wisely avoided. Or perhaps the comfort and stability that Apple epitomizes has permanently raised its value, and that safety does merit a premium multiple. In that case, continuing big buybacks makes sense. That scenario’s possible but unlikely. On paper, the best option might be to conserve cash and buy back loads of stock when Apple is obviously cheap or fairly priced. That course might better satisfy the Buffett criteria. But it’s tough to depart from a tradition that’s been so famously successful.

The only clear conclusion is the one dictated by the numbers. For folks thinking of buying Apple at today’s rich prices, consider that those huge buybacks won’t deliver nearly the bang they used to. And if the safe haven halo fades, and Apple reverts to its traditional middling valuation, the return to the old normal would turn what looked like shelter into the cold comfort of stinging losses.