Share buybacks have their supporters and detractors, but if we talk about Big Tech on Wall Street they have a different color. They have been buying back shares at record levels. But why is it important that they do this? Alexandra Garfinkle at Yahoo Finance answers us.
These types of share buybacks are controversial, because they often reflect positively on earnings per share (EPS) and, consequently, on the value of the company’s shares.
Critics fear that the buybacks, which are often debt-financed, will contribute to financial fragility in markets, although some studies have suggested that the system-wide effects of buybacks are finite. Meanwhile, proponents will say that buybacks are a way to reinvest in their companies, putting extra money to work. Even President Biden has taken notice, imposing a new tax on buybacks this year alone. Although there is limited agreement on what the long-term effects of buybacks are, how they affect the economy as a whole, and what needs to be done, two things are clear.
First, buybacks are at this point incredibly common. In 2021, S&P 500 companies bought back $882 billion worth of stock, breaking records.
Second, Big Techs are big fans of buybacks. Tech companies account for about 35% of quarterly buyback spending, the most of any sector, according to investment research management firm VerityData.
NVIDIA’s $3.1 billion buyback, which was the largest on record, as was Amazon’s $3.3 billion buyback.
Meta (Facebook) buyback in the second quarter recorded $5.1 billion, a comparatively small number when contextualized over 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 posted the largest share buyback of any company in any sector in the second quarter of 2022 and consistently makes around $21 billion in share buybacks.
“Apple has spent more on buybacks than any US company, probably any company in the world, during our record period, from 2004 to the present,” VerityData research director Ben Silverman said.
Investors often like buybacks at first sight, as they are seen as boosting earnings per share and improving shareholder value.
“However, as technology companies continue to buy back shares at a rapid pace, investors should remember that not all buybacks are created equal,” Silverman said. This type of share buyback can absolutely facilitate a stock’s long-term stability and growth, if they are part of a long-term capital expenditure plan. Opportunistic buybacks in response to stock volatility, on the other hand, can not only look bad, but are often not enough to stop the bleeding and point to deep problems within the company.
“The buybacks are not enough to prop up the market or even an individual stock,” Silverman added. “But this week’s market volatility] is an example of a buying opportunity for companies if management truly believes their company’s stock is inherently undervalued.”
So what should investors be on the lookout for, and what do we know about who is doing it right?
“First, candor on the part of management is key,” Silverman cautioned. Investors should keep an eye on how, and if, management is talking about buybacks on earnings calls and public appearances. Apple, for example, is forthright about its buybacks at its highest levels and has consistently made the same share buybacks over and over again. However, if a company is quietly buying back its shares, then that’s when you should be more skeptical.
“If management doesn’t talk about buybacks on earnings calls or at investor conferences, it’s a potential sign that they don’t view buybacks as an important component of their capital allocation strategy,” said Silverman, who has studied buybacks for nearly two decades.
It’s not the ad that matters either, but the execution.
“Repurchase authorization announcements generate many headlines leading to short-term gains for stocks, but retail investors should focus on the actual execution of the buyback,” Silverman added.
Going case by case
To say whether Big Tech buybacks are smart, that is, whether they serve a company’s long-term prospects, we need to look at them on a case-by-case basis. There are some famous and bad cases within the technology of the last 20 years. For example, Silverman described legacy tech giant IBM as the “poster child of bad buybacks.”
“The company’s overall strategy was closely tied to buybacks after the Great Recession and turned out to be a disastrous use of cash over the next several years, providing shareholders with a negative return,” Silverman said.
IBM shares were at their all-time highs in 2012 and 2013, and have been steadily declining ever since.
Meanwhile, there are companies like Nvidia, which steadily bought back its own stock for almost a decade and a half, between 2004 and 2018. The results speak for themselves for Nvidia. At the time, the company’s shares rose 60-fold, attesting to management’s claims in the mid-2000s that its shares were deeply undervalued.
On January 1, 2004, Nvidia was trading at $1.85 a share. As of January 1, 2018, the shares were trading at $61.45 each. On Friday, Nvidia shares opened at $127.42.
Then, of course, there are those cases where the jury is still out. For example, Meta Platforms, which owns Facebook, bought back $44.8 billion worth of shares at $330.55 in 2021. Since then, the company’s shares have fallen sharply, opening Friday at $148.05 a share. “The company’s aggressive stance when it comes to buybacks deserves scrutiny,” Silverman said.