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An attendee wears a Meta Platforms Oculus Quest 2 virtual reality headset at a conference.
Angel Garcia/Bloomberg
Investors love stock buybacks, but they don’t always spur the types of returns one might imagine. It takes a discerning eye to identify companies with buybacks that create significant gains for shareholders.
Buybacks, on their own, increase the value of each share. Repurchases reduce the number of shares outstanding. Keeping earnings constant, earnings per share goes up, supporting gains in the price per share. Buybacks also signal the confidence a company has in using profits and balance-sheet cash to finance these purchases.
But buybacks don’t always spark the type of stock-price gains investors hope for.
Take
Alphabet
(GOOGL), for instance. From 2014 to a few months ago, the stock price rose only about 5% faster than the market value of its equity, or market capitalization, according to Pavilion Global Markets. Why? The parent of Google and YouTube was buying back a few more shares than it was issuing, which companies do to raise new equity investment or to pay employees without using cash. On net, Alphabet’s share count fell a bit, so as the market cap rose, the share price rose a bit faster. But the stock price probably didn’t rise as fast as investors would have wanted, given all the buybacks.
Consider that Alphabet bought back a cumulative $156 billion of stock, 1.88 billion shares, over the 10 years ended in September 2022, according to Pavilion. But the internet giant issued 1.69 billion shares to employees over that time, so the overall count only decreased by just under 200 million shares. The number of shares outstanding fell just 1.2% over that 10-year period, which didn’t juice the share price all that much.
But who’s complaining about additional price gains, even if small? Well, the other factor to consider is the return other firms can generate by buying back shares.
Apple
(AAPL) has been a significant net buyer of stock. It bought back $554 billion, or 11.82 billion shares, in the 10 years ended in September. It issued only 1.47 billion shares to employees, so the share count decreased about 38%. Its stock price has outpaced its market cap by about 60% since 2014.
On the other side of the ledger,
Meta
Platforms (META) has been unimpressive in the buyback category. It bought back 378 million shares in the 10 years ended in September, but it issued 431 million shares to employees so its share count increased about 12%. From its initial public offering in 2012 to September, its market cap rose by a multiple of about 7 times, but the stock price rose less than 5 times, according to FactSet.
Arguably, some companies such as Meta use buybacks as a way of neutralizing the negative price effect of issuing shares. The deal to the market is that the company will conserve cash by paying employees partially in stock, and later on, it will buy back stock to soften the negative impact of the higher share count. Those companies are effectively using repurchases to “sterilize” the negative impact of share issuance, Pavilion noted.
The point is that investors looking for companies executing buybacks should look for those that are net buyers of their own shares by large margins. Meta and Alphabet weren’t several years ago, when they were ramping up profitability years ago and paying employees with a lot of stock instead of using more cash. But both companies have more recently ramped up their repurchases. in 2022, Alphabet bought back almost $60 billion of stock, while stock-based compensation was just under $20 billion. And Meta bought back about $28 billion of stock, and issued less than $12 billion of stock to employees last year.
An example of a stock not to buy on the basis of buybacks:
Workday
(WDAY). Stock-based compensation for its fiscal 2023 was about $1.3 billion, while it recently authorized a mere $500 million buyback program.
Buybacks are generally good when they’re done by companies issuing far fewer shares to employees.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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