Investors often view stock buybacks as a positive sign, hoping they will lead to significant returns. However, not all buybacks generate the desired outcome. Identifying companies that truly benefit shareholders requires a discerning eye.
The Value of Buybacks
On their own, buybacks increase the value of each share by reducing the number of shares outstanding. This, in turn, boosts earnings per share and supports an increase in the price per share. Additionally, buybacks serve as a signal of a company's confidence in utilizing profits and cash from its balance sheet to fund these purchases.
The Reality of Buyback Gains
Despite the expectations, buybacks don't always drive the stock price gains investors anticipate. For instance, consider Alphabet (GOOGL). Over the years, from 2014 to a few months ago, its stock price only rose approximately 5% faster than the market value of its equity (market capitalization), according to Pavilion Global Markets.
Why did this happen? Alphabet was buying back slightly more shares than it was issuing. Companies often do this to raise new equity investment or compensate employees without using cash. As a result, although Alphabet's share count decreased slightly, the stock price did not rise as rapidly as investors would have hoped, given the magnitude of the buybacks.
During a 10-year period ending in September 2022, Alphabet bought back $156 billion worth of stock, equating to 1.88 billion shares, as reported by Pavilion. However, over the same timeframe, 1.69 billion shares were issued to employees. Consequently, the overall share count only experienced a slight decrease of just under 200 million shares. The decline in shares outstanding amounted to a mere 1.2%, which had a limited impact on boosting the share price.
While even minor price gains are still welcomed, it's essential to compare the returns generated by different companies through share buybacks.
Apple's Successful Buyback Strategy
In contrast to Alphabet, Apple (AAPL) has emerged as a significant net buyer of stock. Over the past 10 years ending in September, Apple repurchased $554 billion worth of its shares, equivalent to 11.82 billion shares. In comparison, it issued only 1.47 billion shares to employees, leading to a substantial decrease of approximately 38% in share count. As a result, Apple's stock price has outpaced its market capitalization by around 60% since 2014.
In conclusion, while buybacks can increase shareholder value, not all buybacks lead to significant returns. It is crucial for investors to evaluate the magnitude of buybacks, account for the impact on share count, and consider the comparative performance of other companies undertaking similar strategies.
A Deeper Look at Buybacks: Evaluating Meta Platforms (META) and Alphabet's Approach
In recent years, buybacks have become a popular strategy for companies to control their share count and mitigate the negative effects of issuing shares. However, not all buybacks are created equal. Let's take a closer look at how Meta Platforms (META) and Alphabet have approached buybacks and what it means for investors.
META's Lackluster Performance in Buybacks
Unfortunately, Meta Platforms has not displayed an impressive track record when it comes to buybacks. Over the span of ten years leading up to September, the company bought back 378 million shares. However, during the same period, it issued a staggering 431 million shares to its employees. As a result, Meta's share count increased by approximately 12%. While the company's market cap rose significantly since its initial public offering (IPO) in 2012, its stock price only experienced a modest increase of less than 5%.
Using Buybacks to Neutralize Share Issuance
Some companies, like Meta, employ buybacks as a way to counteract the negative impact of issuing additional shares. The rationale behind this strategy is that the company conserves cash by compensating employees partially in stock initially. Subsequently, the company buys back its own stock to mitigate any adverse effects caused by a higher share count. In essence, these companies effectively use repurchases to "sterilize" the negative impact of share issuance, as noted by Pavilion.
Net Buyers vs. Net Sellers of Shares
Investors interested in companies executing buybacks should pay attention to whether they are net buyers or net sellers of their own shares. Both Meta and Alphabet were not net buyers in the past, as they prioritized increasing profitability and compensated employees with a significant amount of stock instead of utilizing more cash. However, both companies have recently stepped up their buyback efforts.
In 2022, Alphabet repurchased nearly $60 billion of its own stock while spending just under $20 billion on stock-based compensation. Similarly, Meta bought back approximately $28 billion of stock and issued less than $12 billion of stock to employees in the previous year.
A Cautionary Tale: Workday's Buyback Program
Choosing Buybacks Wisely
As a general rule, buybacks are most advantageous when companies issue far fewer shares to employees. Investors should seek out companies that are net buyers of their own shares by significant margins. By carefully examining a company's approach to buybacks and assessing whether they effectively control their share count, investors can make sound investment decisions.
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