There are two camps when it comes to stock buybacks. On the 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 of the money spent on buybacks may benefit shareholders more if it is used to expand or improve the company’s operations.
President Joe Biden seems to be in the other camp, and is targeting stock buybacks after companies put billions into the practice during periods of high inflation over the past two years and workers being laid off this year. Biden supported a 1% tax on dollars spent on buybacks, part of the Inflation Reduction Act he signed into law in August.
Following a change in tax law, Chevron Corp.
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Announced a $75 billion buyback plan and Facebook parent Meta Platforms Inc.
meta,
The layoffs coincided with a $40 billion buyback authorization this earnings season.
Biden will propose to increase tax to 4% During his State of the Union address to Congress on Tuesday night. As he makes the final turn in his annual speech, a live example of the potential negative effects of stock buybacks is playing out in real time. Bed Bath & Beyond Inc.
BBBY,
spent $230 million to repurchase shares during its fiscal 2021 fourth quarter, which ends February 26, 2022, even as the company’s sales declined 25% from a year earlier I and the company posted a net loss of $159 million in that quarter. Less than a year later, the company is Bankruptcy is at risk and the Hail Mary may be forced to sell convertible shares in an effort to stay in operation.
Bed Bath & Beyond may be an extreme example of wasted money 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 five major Big Tech companies — most of which Biden’s administration has targeted in antitrust actions — with dollar amounts in the billions, as their At the end of the most recently reported fiscal quarters:
| company | anchor | Billions of dollars spent on repurchases in the last 12 months | share-count change | Billions of dollars spent on R&D in the last 12 months | total repurchase authorization |
|
Apple Inc. |
AAPL, |
$88.4 |
-3.4% |
$27.7 |
$366 |
|
Microsoft Corporation |
msft, |
$28.6 |
-1.1% |
$26.6 |
$60 |
|
Amazon.com Inc. |
amzn, |
$6.0 |
-0.1% |
$68.4 |
$10 |
|
Alphabet Inc. Class A |
Google, |
$59.3 |
-3.7% |
$39.5 |
$120 |
|
Meta Platforms Inc. class a |
meta, |
$28.0 |
-5.7% |
$34.6 |
$109 |
| Yoga | $210.3 | $196.8 | $665 | ||
|
Source: FactSet |
|||||
All five companies managed to reduce the number of shares they held compared to a year ago, as they spent a combined $210 billion on repurchases. Plus, his stock-based compensation — in shares or stock options — totaled $69.3 billion, according to FactSet.
On an annual basis, a 1% federal tax on the five companies’ repurchases would amount 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 far-right column, you can see the totals for buyback programs authorized by the boards of directors of the five companies, as compiled by FactSet: an astonishing $665 billion.
Comparing the amount spent on research and development to the amount spent on buybacks in the last four reported quarters, we see that buybacks were higher for three out of five companies, with Amazon.com Inc.
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And there are meta exceptions.
In the case of Apple Inc.
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The money spent on share buybacks was more than triple that spent on R&D. Apple, on the other hand, posted a profit of $30 billion for its most recent fiscal quarter and $95.2 billion over the past four reported quarters. And it would be hard to argue that Apple isn’t spending enough on R&D.
Thinking about stock count
If you own stock in a company, and then the company issues more shares, your ownership percentage gets diluted. A company may issue shares to raise working capital that it needs to expand or make acquisitions. If it issues shares to help with an acquisition, the expectation is that earnings per share will increase despite the dilution, and you can finally believe it was worthwhile.
But what about stock-based compensation? When the board of directors issues new shares to the officers, the share count is also reduced. Shareholders who are not employees can protest this, and stock buybacks can reduce dilution. But companies often spend so much on buybacks that the total number of shares outstanding declines despite stock-based compensation. This is what happened for the big tech companies listed above.
But if you hold individual stocks, you must keep track of the number of shares. You can find this in the company’s earnings press release each quarter, on the income statement, just below earnings per share. If the number of shares has increased, this may reflect the issuance of shares to fund the acquisition. But this is not always the case.
Oracle Corp
orcl,
The average diluted share count, used to calculate earnings per share during the second quarter of fiscal 2023 ending November 30, was 1.9% higher than a year ago, even though the company spent $3.3 billion on buybacks during the previous four quarters. Have spent Over the same period, stock-based compensation totaled $3 billion.
During Oracle’s third-quarter earnings call, chief executive Safra Katz said the company was “committed to returning value to its shareholders through technological innovation, strategic acquisitions, stock repurchases, prudent use of debt and dividends.” While the stock numbers for the most recent quarter were up, it’s worth looking back. A year ago (i.e. in the quarterly press release filed on December 9, 2021), Oracle’s share count was down 12% year-on-year.
It pays to track the company’s share count, buybacks and stock-based compensation levels over time.
Are buybacks really a ‘return of capital’ to shareholders?
The answer is no — even if the Biden administration said on 6 February That stock repurchases “enable corporations to funnel tax-advantaged payments to wealthy and foreign investors.”
Stock repurchase is not a direct transfer of money to the shareholders. Repurchases are typically done on the open market, and sometimes at historically high prices relative to earnings. Those purchases don’t automatically help investors who continue to own the stock.
Some money managers will argue that buybacks are a more efficient way of allocating additional capital than dividend payments because the latter are subject to income taxes. Then, there is preferential tax treatment for most corporate dividend payments. And shareholders receive the income directly or are free to reinvest it.
There is no guarantee that significant buyback activity and share-count reductions will result in an increase in stock prices.
An excellent example was provided by International Business Machines Inc.
IBM,
The company suspended stock repurchases when it acquired Red Hat in 2019. But over the 10 years until 2018, IBM bought back shares worth $94.4 billion. According to FactSet, the share count decreased by 35% from the end of 2008 to the end of 2018.
For that 10-year period, IBM’s share price rose 35%, while the S&P 500
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increased by 178%. With the reinvestment of its dividends, IBM’s stock had a total return of 76% for the 10 years through 2018, compared to the S&P 500’s return of 243%.
IBM’s annual sales for 2018 were down 23% from its sales in 2008. It appears the buybacks weren’t worth it. From declining sales, it appears that the company’s management realized that it had no better relationship with money during that period.
The acquisition of Red Hat and subsequent suspension of buybacks, along with continued dividend growth, made for a significant strategy shift. IBM’s 2022 sales were up 6% from a year earlier.
Since the end of 2018, IBM stock is up 25%, while the S&P 500 is up 64%. With dividend reinvestment, IBM has returned 53%, while the S&P 500 has returned 76%. IBM stock now has a dividend yield of 4.85%. It has underperformed the S&P 500 since late 2018, but outperformed the index over the course of 10 years with $94.4 billion in buybacks through 2018.
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