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Mark Yu
Mark Yu
Articles (412)  | Author's Website |

Record Stock Buybacks Fueled by Debt and Cash

A review of several companies' buyback activity

August 21, 2019 | About:

Stock buybacks hit a record $1.1 trillion earlier this year, while some companies are anticipated to show some business slowdown.

In the first quarter, the buyback activity of the information technology, financials and health care sectors reached new highs. IT companies' level of repurchases has nearly reached $300 billion, financials cumulatively spent nearly $160 billion and health care has spent $104 billion.

Regardless of the volume of these buybacks, only the IT sector has outperformed the S&P 500 Index so far this year. While the index has returned 16.78%, financials underperformed by 6% and health care returns were 11% lower. IT outperformed the broader index by 1.9%.

The biggest stock repurchaser of them all, Apple (NASDAQ:AAPL), has not slowed down and has exhibited a bottomless thirst for buying back its shares by further increasing its stock repurchase program to $175 billion.

Over the past nine months, Apple has bought back its stock at an average estimated price of $195 a share. The iPhone seller remains liquid with a net cash position of $112 billion. Analysts expect the company to deliver -2% earnings per share growth this year and 10% next year. Apple shares are up 33% year to date.

Another IT company, Oracle Corp. (NYSE:ORCL), ranked second among the largest share repurchasers. The software company announced buyback activity of $24 billion early this year.

In the nine months that ended in February, Oracle has bought back its shares at an estimated average price of $48. The company is in a net debt position of $16 billion. Analysts forecast 10% earnings growth in the next fiscal year. The stock is up 17% so far this year.

Microsoft Corp. (NASDAQ:MSFT) is another lead repurchaser, having allocated $16.8 billion in its recent fiscal year that ended in June. The software company bought back its stock at an average price of $117 per share.

In its most recent filing, the company remained at a net cash position of $61.6 billion, while analysts see 10% earnings growth next fiscal year. Microsoft is up 35% year to date.

Merck & Co. Inc. (NYSE:MRK), a pharmaceutical company, also ranked as one of the most active stock repurchasers, having authorized up to $10 billion for buybacks.

The company bought back its stock at an average price of $77 per share during the first six months of the year. Merck is in a net debt position of $19.5 billion as of the most recent quarter. Analysts forecast 13% upside in earnings per share this fiscal year. The stock is up 12% year to date.

The monster share repurchases from these companies only indicate that their respective management teams consider them to be of good value.

A couple more companies that are worth adding to this list are Pfizer Inc. (NYSE:PFE) and 3M Co. (NYSE:MMM). Although they did not make it on the top share buyback list, both companies recently announced $10 billion worth of buybacks.

Pfizer, a pharmaceutical company, announced a $10 billion share repurchase program in December. As of June, the company has already spent $8.9 billion, having bought back its shares at an average price of $49.

Meanwhile, Pfizer is in a net debt position of $33.8 billion per its latest filings. Analysts see a 6% drop in earnings this year and another 2% decline next year. Pfizer is down 21% so far this year.

3M, a manufacturing company known for Scotch tape and Post-It Notes, authorized up to $10 billion in stock repurchases last year. While at a slower pace compared to other companies, 3M has spent $1.1 billion in the first six months of the year. It repurchased its stock at an average price of $185 per share. 

The company is in a net debt position of $12.8 billion as of June, while analysts forecast a 10% drop in earnings per share this fiscal year. The stock is down 15% year to date.

In conclusion, investors appear to be very appreciative of publicly listed companies that are actively buying back their stock while also being able to maintain a healthy balance sheet. A bonus would be for these companies to deliver further earnings growth down the road. 

Disclosure: Long Apple and Pfizer. 

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About the author:

Mark Yu
I'm a doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

I attempt to dissect one company filing every day. I dislike goodwill and intangible assets.

One company (review) a day keeps the speculation (hopefully) away.

"The only source of knowledge is experience."

"I have no special talent. I am only passionately curious." - Albert Einstein

"To strive, to seek, to find, and not to yield." - Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." - Warren Buffett

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