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Margaret Moran
Margaret Moran
Articles (261) 

3 Top Buyback Spenders of Early 2020

As many pause buybacks, these companies are still spending to reduce the share count

Investors are well aware by now that the pandemic crisis has put many financially struggling companies in a cash crunch. In the first quarter alone, U.S. corporate debt rose by another $1 trillion as companies drew on various credit facilities, further weakening their balance sheets.

Many large-cap public companies were the biggest net buyers of their stock during the past 10 full fiscal years. Now that a third of S&P 500 companies have paused their share buybacks completely and many others have cut their buyback allocations, a key level of support for their share prices has fallen out from under investors feet.

Not all companies have reduced buybacks, though. Now that all the data is in, it turns out that the first quarter of calendar 2020 actually was not a low point for buybacks, with the total repurchase allocation of S&P 500 companies reaching $198 billion. This amount, which is the fourth-highest quarterly share buyback allocation ever for the index, was paid by an even smaller number of large-cap companies that normal.

With U.S. corporate debt reaching 67% of gross domestic product and difficult economic conditions ahead as the world navigates Covid-19, some may be worried that a second stock market pullback is in the cards. On the other hand, some analysts especially those associated with big banks such as JPMorgan (NYSE:JPM) seem certain that prices will only go up from here.

However, the future is impossible to predict with any degree of accuracy. Investors may find it more helpful to focus on company fundamentals instead.

One indicator of fundamental strength is the ability to maintain share buybacks even in the current market conditions. Despite overall market downturns, Apple Inc. (NASDAQ:AAPL), Alphabet Inc. (NASDAQ:GOOG)(NASDAQ:GOOGL) and Oracle Corp. (NYSE:ORCL) were still able to allocate higher amounts of cash to share buybacks during the first quarter, keeping their share prices from falling too sharply. As long as their combination of strong cash generation, stable financials and share buybacks continues, investors can expect that, barring any black swan events, their share prices will be relatively less subject to volatility.

Apple

Unsurprisingly, Apple, the iconic maker of iPhones, Mac computers and a variety of other consumer electronics and software products, was able to maintain share buybacks during its second quarter of fiscal 2020, which ended March 28. During the quarter, the company spent $18 billion on share repurchases (compared to $20 billion in the prior-year quarter) and bumped up the amount of money allocated to the share repurchase program to $50 billion.

Despite Covid-19s unprecedented global impact, were proud to report that Apple grew for the quarter, driven by an all-time record in Services and a quarterly record for Wearables, said CEO Tim Cook, citing increased use of its products due to the work-at-home environment as one of the main reasons for the encouraging results.

On June 15, shares of Apple traded around $344.15 for a market cap of $1.49 trillion and a price-earnings ratio of 27.02. GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 10 out of 10. The cash-debt ratio of 0.86 and Altman Z-Score of 5.53 show financial stability, while the return on capital of 188.31% and operating margin of 24.48% indicate robust cash generation.

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Alphabet

Another big name that maintained share repurchases was Googles parent company, Alphabet. During the first quarter, Alphabet repurchased over $8 billion worth of its common stock, which was a record for the company and nearly tripled the $3 billion in repurchases during the prior-year quarter.

Alphabets Chief Financial Officer Ruth Porat said the following on the second-quarter conference call:

We believe a share repurchase program for us, appropriately sized, is responsible in the current environment based on our capital allocation framework and our cash balance In the beginning of the year, I indicated that we expected to repurchase shares at a pace at least consistent with the fourth quarter on the remaining authorization, and that remains our view for the second quarter.

On June 15, Alphabets shares traded around $1,420.01 apiece for a market cap of $972.01 billion and a price-earnings ratio of 28.74. GuruFocus gives the company 9 out of 10 rating for both its financial strength and its profitability. The cash-debt ratio of 6.98 and Altman Z-Score of 10.62 show that the company has plenty of cash, while the return on capital of 49.63% and operating margin of 21.36% indicate high cash generation.

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Oracle

Oracle is yet another large-cap tech company that saw business proceed relatively unchanged (compared to the rest of the market) during its first quarter of fiscal 2020, which ended on Feb. 29. The designer and manufacturer of database software and cloud engineered systems products spent $3 billion on share repurchases during the quarter, which was less than the $8 billion in spent in the prior-year quarter. The company also increased the share repurchase authorization by $15 billion.

"We had an extremely strong quarter with Total Revenues growing 3% in constant currency, CEO Safra Catz said in the earnings report. Subscription revenues, made up of Cloud Services and License Support revenues, grew 5% in constant currency. These consistently growing and recurring subscription revenues now account for 71% of total company revenues, thus enabling a sequential increase in our operating margin.

On June 15, shares of Oracle traded around $53.30 for a market cap of $166.76 billion and a price-earnings ratio of 16.77. GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 8 out of 10. While the cash-debt ratio of 0.5 is below 75.18% of competitors, the return on capital of 226.92% and operating margin of 35.84% indicate robust profitability. Additionally, the stock is trading near its Peter Lynch earnings line, indicating a potential value opportunity.

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Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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