There seem to be two camps when it comes to stock buybacks. On one hand, share buybacks can reduce a company’s share count, which increases profit per share and hopefully supports a rising stock price; on the other hand, some money spent on buybacks might benefit shareholders more if it is used to expand or improve a company’s operations.
President Joe Biden has seemed to be in the second camp, and is targeting stock buybacks after companies poured billions into the practice during a period of high inflation over the past two years, and while laying off workers this year. Biden supported a 1% tax on dollars spent on buybacks, which was part of the Inflation Reduction Act signed into law in August.
Following the change in tax law, Chevron Corp.
announced a $75 billion repurchase plan and Facebook parent Meta Platforms Inc.
followed layoffs with a $40 billion buyback authorization this earnings season.
Biden will propose the tax be increased to 4% during his State of the Union address to Congress Tuesday night. As he makes the final tweaks to his annual speech, a live example of the potential negative effects of stock buybacks is playing out in real-time. Bed Bath and Beyond Inc.
spent $230 million to repurchase shares during the fourth quarter of its fiscal 2021, which ended Feb. 26, 2022, even as the company’s sales declined 25% from a year earlier and the company posted a net loss of $159 million in that quarter. Less than a year later, the company is threatened with bankruptcy and may be forced to sell convertible shares in a Hail Mary attempt to stay operating.
Bed Bath & Beyond may be an extreme example of money wasted on buybacks. Often the arguments for or against buybacks are more nuanced.
To see why Biden is so focused on buybacks, check out these numbers for the five core Big Tech companies — most of which Biden’s administration has targeted in antitrust actions — with dollar amounts in billions, as of the end of their most recent reported fiscal quarters:
|Company||Ticker||Billions of dollars spent on buybacks over past 12 months||Share-count change||Billions of dollars spent on R&D over past 12 months||Total buybacks authorized|
|Alphabet Inc. Class A||
|Meta Platforms Inc. Class A||
All five companies managed to lower their share counts from a year earlier, as they spent a combined $210 billion on buybacks. At the same time, their stock-based compensation — in shares or stock options — totaled $69.3 billion, according to FactSet.
On an annualized basis, the 1% federal tax on the five companies’ buybacks would come to $2.1 billion — hardly enough to move the needle and change capital allocation decisions. And Biden is unlikely to get his proposed 4% tax with a Republican majority in the House of Representatives.
In the right-most column, you can see the totals for buyback programs authorized by the five companies’ boards of directors, as compiled by FactSet: An eye-popping $665 billion.
Comparing the amounts spent on buybacks to the amounts spent on research and development over the past four reported quarters, we see that the buybacks were higher for three of the five companies, with Amazon.com Inc.
and Meta being the exceptions.
In the case of Apple Inc.
money spent on share repurchases was more than triple that spent on R&D. Then again, Apple posted a $30 billion profit for its most recent fiscal quarter and profits of $95.2 billion over the past four reported quarters. And it would be difficult to argue that Apple hasn’t been spending sufficiently on R&D.
Thinking about the share count
If you hold a company’s stock, and then the company issues more shares, your ownership percentage is diluted. A company might issue shares to raise working capital it needs to expand or make an acquisition. If it issues shares to help fund an acquisition, the hope is that earnings per share will increase despite the dilution, and you may eventually believe it was worthwhile.
But what about stock-based compensation? When boards of directors shovel new shares to executives, the share count is also diluted. Shareholders who aren’t employees may resent this, and stock buybacks can mitigate the dilution. But companies often spend enough on buybacks that the share count declines overall, despite the stock-based compensation. That is what happened for the Big Tech companies listed above.
But if you hold individual stocks, you should keep an eye on the share count. You can see this each quarter in a company’s earnings press release, on the income statement, right below earnings per share. If the share count has risen, it might reflect the issuance of shares to fund an acquisition. But this isn’t always the case.
average diluted share count used to compute earnings per share during its second quarter of fiscal 2023 ended Nov. 30, was up 1.9% from a year earlier, even though the company has spent $3.3 billion on buybacks during the past four quarters. Over the same period, stock-based compensation totaled $3 billion.
During Oracle’s third-quarter earnings call, Chief Executive Safra Catz said the company was “committed to returning value to our shareholders through technical innovation, strategic acquisition, stock repurchases, prudent use of debt, and a dividend.” While the share count was up for the most recent quarter, it is fair to take a further look back. A year earlier (that is, in the quarterly press release filed on Dec. 9, 2021), Oracle’s share count was down 12% year-over-year.
It pays to keep an eye on a company’s share count, buybacks and level of stock-based compensation over time.
Are buybacks really a ‘return of capital’ to shareholders?
The answer is no — even though the Biden administration said on Feb. 6 that stock repurchases “enable corporations to funnel tax-advantaged payouts to wealthy and foreign investors.”
Stock repurchases aren’t direct transfers of money to shareholders. The repurchases are typically made in the open market, and sometimes at historically high prices relative to earnings. Those purchases don’t automatically help investors who continue to hold the stock.
Some money managers will argue that buybacks are a more efficient way to allocate excess capital than dividend payments because the latter are subject to income taxes. Then again, there is the preferential tax treatment for most corporate dividend payments. And shareholders receive the income directly or are free to reinvest it.
There is never any guarantee that significant buyback activity and share-count reductions will lead to rising stock prices.
A classic example was provided by International Business Machines Inc.
The company suspended stock repurchases in 2019 when it acquired Red Hat. But for 10 years through 2018, IBM bought back $94.4 billion worth of shares. The share count was reduced by 35% through the end of 2018 from the end of 2008, according to FactSet.
For that 10-year period, IBM’s share price rose 35%, while the S&P 500
rose 178%. With its dividends reinvested, IBM’s stock had a total return of 76% for 10 years through 2018, compared with the S&P 500’s return of 243%.
IBM’s annual sales for 2018 were down 23% from its sales in 2008. It would appear the buybacks weren’t worth it. From the sales decline, it would appear the company’s management felt that it had nothing better to do with the money during that period.
The Red Hat acquisition and suspension of buybacks ever since, along with continuing dividend increases, have made for a significant strategy shift. IBM’s 2022 sales were up 6% from a year earlier.
Since the end of 2018, IBM’s stock has risen 25%, while the S&P 500 has risen 64%. With dividends reinvested, IBM has returned 53%, while the S&P 500 has returned 76%. IBM’s stock now has a dividend yield of 4.85%. It has underperformed the S&P 500 since the end of 2018, but to a far lesser degree than it trailed the index during the 10-years of $94.4 billion in buybacks through 2018.
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