Hello,
What do you think about Microsoft buyback plan ? Is this really the best use of their cash? Value-wise MSFT is trading near all time highs and stocks are very expensive if compared to historical averages.
Is this the best use of the money to create value for shareholders? This buyback and dividend increase good with the slowing revenue and diluted eps and high valuations?
What do you think?
That’s my question with all this S&P500 buyback mania, not seeing how this is smart.
The other option it to allow managers of these companies to waste that cash buying terrible companies that add little to no value and give a fat payout to some idiot that started a blockchain company (or some other current tech buzzword)
Huge companies like MSFT, Apple etc seem to be completely done with their ability to truely innovate and are just generating cash off of their old ideas. Not the worst thing in the world but I certainly wouldnt trust either of these companies to be making large investments (Apple possibly buying McLaren anyone?)
Matt Levine talks about this a lot, the companies have previously innovated, they no longer do and return capital to shareholders who can allocate that to companies that actually do innovate. Unfortunately for most people that innovation comes prior to companies turning public (recently it seems you only turn public if you tapped out private funding) and those investments are made by VC firms.
no cash cow tech company should maintain a net cash position as it is a drag on earnings and return on everything. this buyback will put them at a zero-ish cash position. keep cash at zero if not lever up due to predictable cash flows, if you want to make acquisitions, buy with stock or debt then. you could argue they should wait for a better trading price before buying back stock but they generate so much cash that they’ll have plenty for buybacks next year and the year after that.
buybacks are only really bad when they are performed by cyclical industrials or retailers that need the cash to remain solvent when an inevitable business cycle trough appears. sadly, the list of companies who perform buybacks is dominated by cyclical companies that are currently signing their own death certificate.
^ Basically the argument for buyback is what the hell else are they going to do with it! They dont have enough projects to invest in, so they can burn it purchasing companies, burn it on R&D trying to expand into new markets (historically very unsuccessfully) or send it back to investors. None of them is a particularly thrilling option but thats what happens with old tech companies that have peaked
it’s not just about their maturity level, it’s about their sheer size. what do you propose they do with $25 billion in free cash flow every year? there are only so many LinkedIns, Nokias and Skypes to buy and there are few if any projects that require billions in capex upfront. this is part of the reason why start-ups have such ridiculous valuations right now. the start-up market valuations reflect the lack of opportunities facing massive tech companies. the reasoning for a buyback program is that making $25 billion worth of mostly stupid acquisitions every year will have a lower return than their own internal projects so it is optimal for Microsoft to invest in Microsoft’s own earnings power.
i think really only AMZN, MSFT, GOOG, ORCL, SAP, INTC, IBM and FB face this scale issue and AMZN and FB have enough projects to cover most of their cash flow for the time being. most smaller companies should be able to take on large projects or consistently make smart acquisitions with their cash.
Yes,
But with this valuation future returns are almost certainly going to be bad… this NIRP or ZIRP doesn’t help in the look for some yield to generate value to shareholders and of course the Unicorn-stat-up market is not the solution.
I’m not arguing against buybacks, but in this environment I think holding cash reserves (and forgetting for a while of the opportunity cost) would be the most logical thing to do.
Things do look bad, they (S&P500 companies in general) aren’t investing in the future. You gotta invest years ago, for earning today. But they’ve done nothing up buybacks for years. Now what? A decade of suck earnings, with valuations starting at 25X?
MSFT specifically, these people are idiots. AAPL, they still show potential, eventually they will be idiots, but not yet.
Buybacks are fine as long as the company itself has yields above potential targets.
You should never absorb a company who will dilute your margins permanently, it just doesn’t make sense. Strategic moves that are dilutive should be relatively small and accompany/enhance your business model.
For those saying MSFT isn’t investing, they spend $12bn a year on R&D.
you have to remember that MSFT’s duty is to long-term shareholders, as in perpetual shareholders. the market valuation may be above average now, and the 10 year return on MSFT shares may be in the low single digits, but the company’s extreme long-term return will likely be around the 7-10% mark. having a potentially permanent cash drag does nobody any good. the only reason you wouldn’t buy back stock is if you think interest rates are going to go up 5% and the market adjusts down as a result. so long as long-term rates are 2-4%, which increasingly looks like forever at this point as all nations are japanifying, the mean market valuation 20 years from now could end up being higher than the current market valuation.
the bottom line is that if they don’t use any cash for buybacks over the next four years, they’ll be back to having $100B in cash in the bank and they’ll be under pressure to buy back at that point. spreading buybacks out by doing them annually is like dollar cost averaging. they’re being cautious. like i said before, these companies have a different decision making process than industrial or retail stocks that are pressured to buy back because of activist shareholder or management incentives.
Just remember that “G” in the Gordon Growth Model is much of your value. A big buyback program is telling you something about “G.” I don’t think the market has been very effective in pricing this in recently. I’m steering away from big buyback programs.
Are you also avoiding dividend paying stocks? I don’t get the obsession with stock buybacks.