MSFT Continues Buyback Frenzy
Microsoft MSFT is up almost 2% today after the board announced the approval of a $40 billion stock buyback program and an 11% dividend increase. Microsoft is the most cash (& cash equivalent) rich company in the market and has been buying back its own stock for almost a decade.
Stock buybacks are hitting record highs as companies with excessive amounts of cash on hand want to keep shareholders happy with short-term share appreciation. Apple AAPL, Oracle ORCL, and Microsoft rank amongst the largest stock repurchasers of 2019 so far.
Through the first half of the year, Apple bought back $42 billion in its shares, while Oracle repurchased $16.3 billion, and Microsoft purchased over $9 billion in its own shares. 2018 marked an all-time high for stock repurchases with a market total of over $800 billion stock buybacks.
AAPL has bought back roughly a quarter trillion dollars’ worth of its own stock over the past 5-years, while Oracle and Microsoft come in at over $70 billion in the same time frame.
These are some of the most cash rich companies in the world, but are they putting their cash to good use?
Productive Use of Money
Are share buybacks the most productive use of funds for producing long term shareholder returns? There are a few sides to this coin and they are very circumstantial. There are three things that a company can do with the cash on their balance sheet, one is let it sit in some low interest earning account, be used as commercial paper, or be put in some other fixed income vehicle. This will have very little effect on a stock price because this is what is expected from a cash pile on a company’s balance sheet.
The next thing that a company can do with extra cash is to invest in either organic developments like R&D or sales & marketing, or in a productive acquisition (full or partial). Cash used in this manner is typically the most advantageous for all stakeholders, as long as the investments have robust ROIs (return on investment). In an environment where valuations are high, acquisitions and R&D are more expensive than the projected returns. This avenue would not be the most productive use of cash.
The final use of cash that I will discuss is giving it directly back to the shareholders through dividends and stock buybacks. This use of capital will boost short-term share prices, but will it have a long-term positive effect for shareholders? A consistent dividend is a sign that a company has matured and expects a reliable stream of income moving forward. Dividends are good for a stock stability if the firm is able to maintain its dividend yield.
Stock repurchase programs will have the same short-term stock price boost as an additional dividend, but the difference is that it is not typically consistent and will only create shareholder value if the shares bought are undervalued. Buying back stock when the intrinsic worth of the stock is below its current price will deteriorate shareholder value.
Back to Microsoft
Microsoft is trading at its all-time high right now and its forward P/E has been surging over the last 5 years as investors become more excited about Microsoft’s cloud platform, Azure. Should Microsoft be buying back its own relatively expensive stock, or should the company be investing more in its cloud platform? The firm could be using the cash to further consolidate the cloud market through savvy acquisition of small cloud firms.
Like I said, high valuations make acquisitions a less attractive play and valuations in the tech industry are slightly high currently. There is only so much money that a company can poor into its R&D department before they start losing marginal value.
Though, buying stock back at all-time highs doesn’t look great for long term shareholder value, especially when its forward P/E is the highest its been in over a decade.
I am not a big fan of companies throwing their extra cash back at the shareholders when there is still a substantial amount of growth potential. In my opinion, these tech stocks should be focusing on advancing technology and in turn humanity, instead of being worried about short-term share price boosts.
Stocks like AAPL and ORCL have shown little to no top or bottom-line growth this year but their stock price still seems to appreciate. This is primarily due to their stock buyback programs. Some of these tech companies use buybacks as merely a way to preserve their stock’s attractiveness.
There is a time and place where stock buybacks are appropriate such as when the stock price is undervalued and there are no more productive uses for the money, but this can still be speculative.
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