Stock Buybacks

Posted By Darren Winters on Jun 20, 2024

Stock Buybacks

Stock buybacks could be the next adrenaline rush to keep the bulls running, particularly as the Fed loosening cycle commences in the second half of 2024 in time for the presidential elections.

Fed rate cuts are coming soon, which will help fuel a new wave of stock buybacks

Already, two central banks cut their base rates in June last month. 

The European Central Bank trimmed its key rate from 4% to 3.75%, its first rate cut in nine years.

Such a move follows the Bank of Canada’s rate cut a week earlier to 4.75% from 5%. Central banks in Sweden and Switzerland have also trimmed rates in 2024.

Fed is forecasted to follow suit with its first rate cut of the cycle, bearing in mind Western aligned central banks tend to operate in cahoots to prevent currency volatility. 

So, as central banks begin their loosening cycle with rate cuts, US stock buybacks are expected to exceed $1 trillion in 2025, according to Goldman Sachs.     

The bank sees this growth driven by robust tech earnings growth and lower rates.

What is a Stock Buyback?

Stock Buybacks

A stock buyback is when a company buys their shares to reduce the number of available shares on the market. Companies may choose to buy back stock to return value to shareholders. Fewer shares in circulation improve earnings per share and could improve the stock price.

But buying back stocks is a double-edged sword since the opportunity cost of buying the company’s stocks is the forgone CAPEX investments in plant and machinery to grow the business. 

Stock Buybacks of Tech Titans

The Magnificent Seven companies, Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG and GOOGL), Amazon (AMZN), NVIDIA (NVDA), Tesla (TSLA) and Meta Platforms (META) alpha stock performance over the last year was mainly due to stock buybacks. 

Here are the Magnificent Seven companies’ buybacks as a % of Market Cap

Values have been rounded to the nearest billion dollars

The company market caps are as of June 6, 2024.

Apple bought $83B, representing 2.8% of its market cap. 

Alphabet (Google) bought$63B, representing 2.9% of its market cap.

Meta bought $25B, representing 2.0%.

Microsoft bought $20B of its stock, representing a 0.6% market cap. 

The darling Nvidia bought $17B, representing a 0.6% market cap. 

Amazon $0B 0.0%

Tesla $0B 0.0%

Apple had the most stock buybacks, raising its diluted earnings per share from $1.26 to $1.53.

Apple also authorized an additional $110 billion, for share repurchases, a US record.  Apple’s board argued that repurchases are due to their “confidence in Apple’s future and the value we see in our stock.”

Then why not invest in R&D? 

Amazon and Tesla did not issue stock buybacks in the last four quarters. Amazon’s CFO Brian Olsavsky recently emphasized the company’s strategy of reinvesting in the business. Amazon intends to reduce debt and data centres, to take advantage of AI.

So there you have it, the darling tech companies’ stock prices, pumped up on stock buybacks, and the show has just started.

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