When it comes to corporations returning capital to shareholders, the two most classical methods are dividends and share buyback plans. There are of course other means for companies to reward shareholders, but these two are the classic methods. It turns out that corporations are using massive stockpiles of cash to buy back shares in droves in 2018, even as the stock market challenges all-time highs all over again.
24/7 Wall St. has been tracking scorecards for companies issuing earnings and post-earnings related news all summer. There have been many buyback announcements that are just too large to ignore. These are not solely the largest buyback authorizations by market cap, but they are the ones that stood out the most for fresh new buyback dollars and that also could affect the underlying shares of each company the most.
Goldman Sachs made a recent forecast that August is the top month for companies actually to spend the cash to repurchase their shares. That makes the timing of this review critical. Goldman Sachs also projected that corporate stock buyback authorizations could reach $1 trillion by the end of 2018, about one-third more than the current tally of roughly $750 billion. That said, investors should understand that authorizations do not necessarily mean that the companies allocate all that capital at once, nor even in a single year.
Multiple issues are driving stock buybacks. One is tax reform and another is that companies are rarely criticized for pre-shareholder efforts that act to reward them for holding these shares. Not all buybacks are created equal, as some aim to offset executive and employee stock options.
Interestingly enough, some of the buybacks have not yet contributed to higher share prices since the announcements were made.
Here are eight of the summer’s top new or expanded buyback announcements from corporations during earnings season or around their shareholder meetings. A reference has been made to each company’s total buyback, along with some history and views, and these should show why each buyback has stood out more than myriad other buyback announcements.
1. The Big and Mighty Apple
Apple Inc. (NASDAQ: AAPL) already has bought back billions upon billions worth of its own stock, and those buybacks have not prevented Apple from becoming the first company to reach the $1 trillion market cap level. Some hints from Apple suggested that the company would buy shares more aggressively, but open-market regulations may be preventing the company from effecting these plans as fast as it might otherwise. The strong earnings report and the strong guidance helped. Apple being the all-time buyback king is also helping.
In the past quarter, Apple returned almost $25 billion to investors through its capital return program, including $20.8 billion in share repurchases. According to Forbes, Apple set a record in the S&P 500 with its $22.8 billion of share repurchases in the first quarter of this year. The company previously announced a $100 billion share repurchase program in May, and it seems well on its way accomplishing this. Buybacks or not, Apple still has ample room to keep raising its dividends in the years ahead as well.
2. Warren Buffett’s Revenge
Berkshire Hathaway Inc. (NYSE: BRK-A) has decided to let Warren Buffett and Charlie Munger expand the logic of buybacks to almost whatever criteria they see fit. While formal buybacks were not announced, the reality is that Berkshire Hathaway simply left the goal of keeping a $20 billion floor for its cash balances. That could imply a buyback over time of $20 billion, $50 billion or even more, considering its $100 billion or so in liquidity. Berkshire Hathaway’s B shares were trading at $190.41 ahead of the announcement on July 18 (and were down about 4% in 2018 at the time), but those shares jumped to $200 on the news, and the stock was up at $206 after earnings drove shares higher.
Berkshire Hathaway has a $500 billion market cap. Think about this for a second: Buffett created a huge one-day move (the largest in more than five years) without even formally committing to a buyback. Now that’s impressive!
3. Cat Fight Versus Trade Wars
Caterpillar Inc. (NYSE: CAT) may have a trade war target on its chest if things get too bad with China and Europe. Still, the heavy equipment giant beat earnings expectations and lifted its range of 2018 earnings to $11 to $12 per share. As for the buyback angle, Caterpillar disclosed $10 billion more available for share buybacks. The prior plan is set to expire this year and had some $4.5 billion remaining. The company spent about $750 million on buybacks during the second quarter and is targeting another $1.25 billion or so for buybacks during the second half of 2018.
Caterpillar shares were trading at about $142.50 ahead of the July 30 earnings announcement, and they were last seen trading closer to $140. Imagine what might have happened without a buyback announcement. The market cap is $83 billion.
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