Why Big Tech Stock Buybacks May Be Slowing

Tech stocks are leading the market, with the Technology Select Sector Index up by 29.9% year-to-date through July 11, 2019, versus a 19.7% advance for the S&P 500 Index (SPX), per S&P Dow Jones Indices. Among the factors contributing to tech’s outperformance has been heavy spending on share repurchases, or stock buybacks, by the biggest firms in the sector. However, the cash available to fund buybacks is drying up, The Wall Street Journal reports.

Tech giants Apple Inc. (AAPL), Microsoft Corp. (MSFT), Cisco Systems Inc. (CSCO), Qualcomm Inc. (QCOM), and Oracle Corp. (ORCL), combined to spend more than $175 billion on buybacks during their 4 most recently-reported fiscal quarters, per data from S&P Capital IQ cited by Journal. A group of 20 tech firms, including those mentioned above, spent an aggregate $261 billion, representing 40% of the total outlays on buybacks from the 100 biggest spenders in the S&P 500.

The federal tax reform bill enacted in Dec. 2017 slashed the tax rates faced by U.S.-based corporations when repatriating profits earned overseas. Big tech companies had accumulated huge overseas cash balances, and the tax bill encouraged them to bring this cash home. Much of this repatriated cash then was returned to shareholders through stock buybacks.

Among the companies listed above, the spending on buybacks during their most recently-reported 4 fiscal quarters was $75 billion for Apple, $36 billion for Oracle, $23.4 billion for Qualcomm, $22.6 billion for Cisco, and the remaining $18 billion by Microsoft. The high buyback spending by these firms, collectively about 3 times what it was 2 years ago, may not be sustainable going forward, the Journal observes.

Apple’s cash holdings are still massive, at about $225 billion, but the company added more than $100 billion in debt to finance share repurchases in the years before the tax reform bill. Now Apple may be eager to pay down that debt, as well as to invest more in R&D to reduce its reliance on iPhone sales, which are slowing.

Oracle’s revenue grew by less than 1% in its most recent fiscal year, and its outlays on buybacks were nearly 3 times its free cash flow (FCF). Cisco spent about 150% of its FCF on share repurchases. Outlays by Qualcomm were more than 4 times its average annual figure from 2013 to 2017, and much of that bump in buyback activity was a one-time attempt to placate investors disappointed by its failed attempt to acquire NXP Semiconductors NV (NXPI).

Several contenders for the Democratic Party’s presidential nomination in 2020 have made stock buybacks a political issue, claiming that they are bad for the economy and for most Americans, a claim that has been disputed by Goldman Sachs as well as by CEOs Warren Buffett and Jamie Dimon, among others. Given that share repurchases have been the primary source of demand for U.S. stocks in the current bull market, a move by government to curtail or ban buybacks has potentially wide negative implications for all investors, not just those holding major tech stocks.