Share repurchases, or stock buybacks, have become increasingly prevalent in tech companies’ earnings this year. According to Cornell University assistant professor Nick Guest, buybacks don’t create or destroy a lot of wealth. Instead, they serve as an opportunity for management to signal their belief that the stock is undervalued, as quoted on Yahoo Finance.
Some of the biggest buyback announcements this year came from tech giants Alphabet (goog, google), Apple AAPL, and meta platform Meta, formerly known as Facebook.
Understanding Criticisms and Data
Critics argue that buybacks can be used to manipulate share prices, contribute to excessive executive compensation, and limit cash available for investment opportunities, thereby sacrificing growth and profitability. However, Guest’s research comparing companies that repurchase shares with companies that did not found any significant evidence supporting these criticisms.
Major Tech Buybacks: Google and Apple
Recent buyback announcements by Alphabet and Apple have attracted attention amounting to $70 billion and $90 billion, respectively. While these figures may appear large, they represent only 5.2% of Google’s market cap, making them relatively modest when adjusted for market-wide comparisons.
Why companies choose buybacks
Share repurchases, or buybacks, occur when a company uses its cash to buy back some of its outstanding shares from the market. This reduces the number of shares in circulation, which increases the ownership stake of existing shareholders and increases the earnings per share (EPS) ratio.
Guest suggests that stock buybacks offer more flexibility than dividends, as they can be cut temporarily during downtime and reduce the potential for misappropriation of cash on management’s pet projects. Additionally, repurchased shares can be used to compensate employees, providing other benefits in addition to improving long-term profitability or creating additional investment opportunities.
Ideal position for buyback
Along with VerityData analyst Ali Ragih, we also believe that the best time to buyback is when the company’s valuation is low, as they get the most value for their buyback. For example, if Google spends $15 billion on repurchases, a lower share price will yield more shares for the same dollar value. Companies with high free cash flow and limited investment opportunities, such as Alphabet, are well positioned for buybacks.
Tech leads buybacks most of the time
We all know that tech stocks took a huge tumble last year due to rising rates and their valuations were rightfully theirs. This opens up solid buyback opportunities for them this year. According to a recent report from the S&P Dow Jones Indices, tech companies accounted for 28.8% of all buybacks in the third quarter of 2022, compared to 32.8% in the second quarter of 2022 and 28.2% in the third quarter of 2021.
Which ETFs Can Benefit From Tech Buybacks?
There are many ETFs that track indices that focus on companies with high buyback rates. Here are four examples:
Invesco QQQ Trust (QQQ)
It is one of the most popular and liquid ETFs in the market. For example, Apple, Microsoft (MSFT), and Alphabet are among the top holdings on the QQQ.
Vanguard Information Technology ETF VGT
The ETF also has exposure to some of the biggest buyback achievers in the technology sector, such as Apple, Microsoft and Cisco Systems (CSCO).
Invesco Buyback Achievers ETF (pkw,
The NASDAQ US Buyback Achievers Index consists of US securities issued by corporations that have effected a net reduction in outstanding shares of 5% or more over the past 12 months. The fund charges 61 bps in fees.
With a growing backlash against buybacks, shareholders may see fewer of them in the future if disincentives increase or sanctions are imposed. The White House said that in his State of the Union address in early 2023, US President Joe Biden will urge Congress to pass a 20% minimum tax on billionaires and increase the new 1% tax on corporate stock buybacks to 4%.
This can lead firms to retain cash or switch to dividends, which can have negative consequences, such as higher taxes on dividends than on buybacks that generate capital gains.
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Apple Inc. (AAPL): Free Stock Analysis Report
Invesco QQQ (QQQ): ETF Research Report
Alphabet Inc. (GOOGL): Free Stock Analysis Report
Invesco Buyback Achievers ETF (PKW): ETF Research Report
Vanguard Information Technology ETF (VGT): ETF Research Report
Meta Platforms, Inc. (Meta): Free Stock Analysis Report
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Jax Investment Research