Self-absorbed shopping spree... Last week, Microsoft's board approved a plan to buy back as much as $60B of the company's own stock — the software giant's largest share repurchase program ever. Stock buybacks are (kind of) like gifts to shareholders: by reabsorbing their own shares, companies can potentially improve their stock prices by reducing the number of available shares.
- When shares outstanding decrease, investors' ownership in the company pie can increase. Think: owning 1 share out of 10 total, vs. owning 1 out of 5.
- Slightly awk: Microsoft shares are already sitting near records, and have soared 38% this year. But it's also sitting on a $130B cash pile, so it has money to spend.
Takeout or delivery?... Corporations have different options when it comes to spending extra $$$. They can invest it back into the business (think: hiring, R&D, building factories) — or, they can return value to shareholders through dividends and stock buybacks. Microsoft has used its ginormous cash pile to fund acquisitions, boost dividends, and do buybacks. Many companies flush with excess cash are doubling down on buybacks, too.
- Spending on buybacks increased much faster than capital expenditures (think: buildings, equipment) in the first half of 2021.
- S&P 500 companies spent more on buybacks than on capital expenditures in the first half 2021. Share repurchases hit $370B, up ~30% from the first half of 2020.
- For example: Lowe's, which thrived on the DIY House Hype, spent $6B on share repurchases — compared with barely $850M on capital expenditures. Target, another corona-conomy thriver, recently announced $15B in buybacks.
The Big Buyback relates to the Big Shortage... Many US businesses are cash-rich, thanks to low interest rates on debt and strong earnings fueled by economic recovery. The problem: supply and labor shortages are limiting how much companies can invest back into their businesses. But the Big Buyback, which could be contributing to soaring stock prices, could hit speed bumps ahead: Democratic senators just proposed a 2% tax on corporate buybacks to help fund the $3.5T US budget bill.