Tech's record-breaking buybacks matter to investors—here's why

Big Tech is making big buybacks.

Of course, this has been the case for years, but we’re seeing companies like Apple (AAPL), Alphabet (GOOG, GOOGLE), Amazon (AMZN) and Nvidia (NVDA) doubling buyback, which is when a company buys its own shares, reducing the total number of shares. These types of share buybacks are controversialas they are often reflected positively in earnings per share (EPS) and, therefore, in the company’s stock value.

Critics worry that buybacks, which are often financed by debt, contribute to financial instability in the markets, although some studies suggest that system-wide buyback effects are limited. Meanwhile, proponents will say buybacks are a way to reinvest in their companies, putting extra cash to work. Even President Biden noticed taxation new tax on buyback just this year. While there is limited agreement on what the long-term effects of buybacks are, how they affect the economy as a whole, and what should be done, two things are clear.

First, repurchases at this stage are incredibly common. In 2021, the S&P 500 companies bought back $882 billion of stock, breaking records.

Second, Big Tech is a big fan of buybacks. Technology companies accounted for roughly 35% of quarterly buyback spending, the largest share of any sector, according to investment research management firm VerityData.

For the second quarter of this year, here’s what we’re talking about. Below, for the second quarter, you’ll see Nvidia’s $3.1 billion buyback, which was the largest ever, as was Amazon’s $3.3 billion buyback.

Meta’s buybacks in the second quarter came in at $5.1 billion — a relatively small number when contextualized with the previous four quarters of $7.1 billion, $14.4 billion, $19.2 billion, and $9.4 billion.

Then, of course, there’s Apple, which had the largest buyback of any company in any sector in the second quarter of 2022 and is consistently doing around $21 billion in share buybacks.

“Apple has spent more on buybacks than any U.S. company — probably any company in the world — over our record period, from 2004 to today,” said VerityData director of research Ben Silverman.

Investors tend to like buybacks at first glance because they are seen as EPS-boosting and shareholder value-enhancing.

However, as tech companies continue to buy back shares at a rapid pace, investors should remember that not all buybacks are created equal, Silverman said. These types of share buybacks can absolutely facilitate the stability and long-term growth of a stock—if they’re part of a long-term capital spending plan. Opportunistic buybacks in response to stock volatility, on the other hand, not only can look bad, but often aren’t enough to stop the bleeding, while pointing to deeper problems at the company.

“The buyback is not enough to support the market or even an individual stock,” Silverman said. “But [this week’s market volatility] is an example of an opportunity to buy companies if management truly believes that their company’s stock is intrinsically undervalued.”

So what should investors be on the lookout for, and what do we know about who’s getting it right?

First, candor on the part of management is key, Silverman said. Investors should monitor how and if management talks about the buyback at all in earnings calls and public appearances. Apple, for example, has been straightforward about its buybacks at its highest levels and has consistently repurchased the same shares over and over again. However, if a company is quietly buying back its stock, then you should be most skeptical.

“If management doesn’t talk about buybacks on earnings calls or at investor conferences, that’s a potential sign that they don’t see buybacks as an important component of their capital allocation strategy,” said Silverman, who has studied buybacks for nearly two years. decades.

Also, it is not the announcement that is important, but the execution.

“The buyback authorization announcements generate a lot of headlines that lead to short-term hits for stocks, but retail investors should focus on the actual execution of buybacks,” he said.

The logos of tech giants Amazon, Apple, Facebook and Google.  REUTERS/File Photos.

The logos of tech giants Amazon, Apple, Facebook and Google. REUTERS/File Photos.

Go just in case

To tell whether a Big Tech buyback is smart — that is, whether it serves the company’s long-term prospects — we have to look at them on a case-by-case basis. There are some famous bad cases in technology from the last 20 years. For example, Silverman describes legacy technology giant IBM (IBM) as “the poster child of bad buybacks”.

“The company’s overall strategy was closely tied to buybacks after the Great Recession and proved to be a disastrous use of cash over the next few years, providing shareholders with negative returns,” he said.

IBM stock hit all-time highs in 2012 and 2013 and has been steadily declining since then.

Meanwhile, there are companies like Nvidia that have been buying back their own stock consistently for nearly a decade and a half, between 2004 and 2018. The results speak for themselves in Nvidia’s case. During that time, the company’s stock rose 60 times, proving management’s claims from the mid-2000s that its stock was severely undervalued.

On January 1, 2004, Nvidia was trading at $1.85 per share. By January 1, 2018, the stock was trading at $61.45 apiece. Nvidia stock opened at $127.42 on Friday.

Then, of course, there are cases where the jury is still out. For example, Facebook owner Meta Platforms (META) bought back $44.8 billion in shares at $330.55 in 2021. Since then, the company’s stock has fallen significantly and opened Friday at $148.05 a share. The company’s “aggressive” stance when it comes to buybacks “deserves careful consideration,” Silverman said.

Ali Garfinkle is a senior technical reporter at Yahoo Finance. Follow her on Twitter at @agarfinks.

Read the latest financial and business news from Yahoo Finance.

Download the Yahoo Finance app for An apple or Android.

Follow Yahoo Finance on Twitter, Facebook, Instagram, LinkedInand YouTube.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *