Many corporations have sought government bailouts since the Covid-19 pandemic put the economy into reverse. In the cases of some companies, this prompted a backlash from critics, as these companies had recently spent millions or billions buying back their own (often overvalued) stock.
Warren Buffett (Trades, Portfolio) captured this mood during Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) annual meeting of shareholders on May 2. Responding to a question about stock repurchases, he said it had become “very politically correct” to speak out against them. Buffett defended buybacks in general, saying they were a legitimate way to distribute cash to shareholders.
In fact, Buffett reported that Berkshire had bought back some of its own shares in the first quarter of this year. He explained that share buybacks are a good practice when stocks are selling for less than their intrinsic value and the company has an ample store of cash on hand.
Some of the firms that should not have been buying back their stocks were the airlines. According to AlphaSense, a market intelligence company, Delta (DAL, Financial), American Airlines (AAL, Financial) and Southwest (LUV, Financial) all repurchased shares in March.
Among large-cap, publicly-traded corporations, 99 companies bought back shares in March. The biggest among them were three tech companies: Apple (AAPL, Financial), Alphabet (GOOGL, Financial) and Microsoft MSFT). Combined, these companies bought back enough of their own shares to make up more than 44% of all buybacks for the month.
However, one big tech company did not buy back shares - Amazon.com (AMZN, Financial). The company has not bought back any of its own shares since 2012, even though the board authorized up to $5 billion worth of repurchases in 2016. The company has also never issued dividends.
In this article, we will take a look at potential reasons why Amazon.com has not repurchased shares while Apple has repurchased a ton.
The chart below shows the amount of cash and cash equivalents each of the two companies had on hand at the end of their most recent quarters:
As we can see, Amazon’s cash flow has been relatively stable, while Apple’s spiked recently. There are many potential ways to use that extra cash, including increasing capital expenditures, making acquisitions (CEO Tim Cook said in 2019 that Apple buys another company every two to three weeks), increase the dividend (which was 82 cents in the most recent quarter for an annual yield of just over 1%) and buying back shares.
Buying shares not only returns cash to shareholders, it also reduces the share count, increasing the earnings per share and driving up the share price. If there are not enough attractive acquisition or capex opportunities to consider, I believe this is typically the best way to return cash to shareholders.
Amazon, on the other hand, has taken the position that it never wants to mature. As CEO Jeff Bezos once put it, "Day 1 is where we always want to be and Day 2 is where we never want to be." Day 1 refers to growth and ever-increasing customer loyalty, while Day 2 refers to a mature phase when companies get comfortable and exchange high growth for returning more capital to shareholders.
As it keeps expanding its online marketplace and develops ancillary projects like iCloud, Amazon sees many opportunities to use its cash profitably. For nearly 25 years now, Amazon has delivered no dividends and few buybacks; it just keeps reinvesting the funds it generates. Long-term investors have profited massively, assuming they bought and held:
Amazon is a rarity in terms of its long-held status as a growth stock, even though it has consistently has had one of the largest market capitalizations for quite a few years.
By eschewing stock buybacks, Amazon has also avoided the risk that it might pay too much when repurchasing its shares. As Buffett and many others have argued, buying your own stock for more than its intrinsic value destroys wealth.
In an article entitled, “Stock BuyBacks: A Lesson Not Learned,” fellow GuruFocus contributor Thomas Macpherson recommended that investors compare corporate stock buybacks with their own valuation processes. The rule for buybacks should be the same as for value investing: never pay too much. He wrote, “Unfortunately, all evidence would suggest that companies go on repurchasing binges as share prices reach new highs and cease purchases as share prices reach new lows.”
For Apple, at least some of its buybacks were at a discounted price, although whether this was below intrinsic value is a matter of viewpoint:
Conclusion
Share buybacks at high valuations are not always exclusively beneficial to company executives and detrimental to shareholders, and I believe this holds true for Apple. Repurchases are a form of capital allocation, and like all types of capital allocation, the best use of it depends on the company.
However, buybacks at high valuations do have the potential to destroy wealth if they are conducted unwisely, such as for the purpose of granting massive paychecks to executives.
Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.
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