Stock buybacks are a controversial issue for investors. On one hand, buybacks tend to boost the price of shares, producing profits for shareholders who hang onto their stock. It also improves per-share performance on key metrics like earnings. Yet historically, many companies have had lousy timing with buybacks, making their purchases at what proves to be the worst possible time, when the stock is at its zenith.
Even with the controversy, more companies than ever have looked at buybacks lately. In particular, technology giants Apple and Cisco Systems are near the top of the list of companies spending money on share repurchases over the past 12 months. Big banks JPMorgan Chase, Bank of America, and Citigroup have also been extremely generous in returning capital to shareholders in this way. Below, we'll look at why these five companies dominate the buyback scene and whether they're likely to continue doing so in the future.
Amount Spent on Buybacks, Past 12 Months
Apple (NASDAQ: AAPL)
JPMorgan Chase (NYSE: JPM)
Cisco Systems (NASDAQ: CSCO)
Bank of America (NYSE: BAC)
Citigroup (NYSE: C)
Data source: S&P Global Market Intelligence.
A big boon from tech buybacks
Apple and Cisco are both among the largest technology companies in the world, and they've made a habit of doing stock buybacks historically. But the major cause of the recent big boost in repurchase activity is the tax reform package that passed in late 2017. Following the tax law change, both companies made major announcements:
- Apple said that its goal going forward was to become net cash neutral, meaning that the company would seek to have an equal amount of cash and debt on its balance sheet. It announced a massive $100 billion stock buyback authorization in May, and the company has spent more than $20 billion on repurchases in each of the first two quarters of calendar 2018.
- Cisco set a target of returning $44 billion in cash to shareholders through a combination of buybacks and dividends. The company raised its authorization for repurchases by $25 billion, bringing its total outstanding buyback capacity to $31 billion. Cisco said it would probably spend that amount in an 18-to-24-month period.
Image source: Apple.
What that means is that we haven't yet seen buybacks for Apple and Cisco reach their peak levels. Moreover, with other major tech companies also having seen immediate benefits from tax reform, the overall buyback activity for the sector will only accelerate through the remainder of the year.
Big banks get the go-ahead to return capital
For JPMorgan, B of A, and Citi, the buyback story is different. In order to return capital to shareholders, these big banks have to get approval from the Federal Reserve. Yet the central bank hasn't been stingy about letting these three institutions reward their shareholders.
Moreover, the banks themselves have gotten even more aggressive about returning their spare cash. JPMorgan boosted its dividend by 43% this year compared with previous levels, and its $20.7 billion expected repurchase activity would be up by about $1.3 billion from its previously authorized plan. Bank of America should see an even bigger bump-up in buybacks, with its plan looking to return $20.6 billion compared with $12.9 billion last year coming with a 25% dividend hike as well. For Citigroup, a plan to repurchase $17.6 billion in stock would be $2 billion higher than its 2017 request, and shareholders will get a 41% higher dividend.
Can buybacks continue?
The conditions that have made these stock buybacks possible show no signs of letting up, and even though tax reform was a one-time event, the continuing access to overseas cash that the new laws allow makes it easier for tech companies to pay shareholders more. For now, investors in large technology and banking stocks can fully expect that the good times for buybacks will continue for as long as the economy stays on steady ground and fosters further growth in their respective industries.
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Dan Caplinger owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.