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Microsoft’s $40 billion buyback would be biggest of last decade

A news article released by CNBC has published an article recently. The article specified a few companies like Microsoft are continuing to buy back billions in their own stock, but last quarter saw a significant decline in the number of companies making such large repurchases.

The number of S&P 500 companies with buybacks over $1 billion dropped to a 3-year low in the second quarter of 2016, according to data released by FactSet this week. Overall, fewer companies were opting to buy back any stock at all, marking the lowest participation rate since the end of 2010.

Last Wednesday, it is apparent that Microsoft has authorized up to $40 billion in buybacks.

The past few months, it has been visible that the big companies like Apple and GE are leading the market for most stock repurchased in the last 12 months.


It the last 10 years, these huge companies have spent a large sum of stock buybacks. This has often been done to boost the price of the remaining shares and to prop up per-share earnings.

According to CNBC, “Despite the decline in buybacks last quarter, S&P 500 companies are still using an extremely large amount of their income to buy back their own shares. They spent nearly 72 percent of net income over the last 12 months on buybacks — up about 17 percent from a year ago.”

It is likely even less affordable for them to do the buybacks in the coming months since the US Federal Reserve decides to raise interest rates.

Take a look at Microsoft’s $40 billion purchase in context. Oddly enough, if the company does buy that full amount, and it doesn’t reissue any of those shares, then that $40 billion alone would be bigger than most S&P 500 companies have done in total over the last 10 years.

As per CNBC:

“Only 14 companies in the S&P 500 have spent at least $40 billion in net stock buybacks over the past decade. The leaders include ExxonMobil ($189 billion), Apple ($111 billion), IBM ($109 billion), Microsoft ($101 billion), Walmart ($66 billion), Pfizer ($60 billion), Procter and Gamble ($48 billion), Home Depot ($47 billion), and HP ($47 billion).”

The buyback shows some evidence that it may not help support the share prices of the company. FactSet’s data showed that companies with repurchase programs have underperformed the S&P 500 in the past year by more than 5 percentage points.

The Fed decided to leave rates unchanged in its September meeting on Wednesday, but if credit tightens, more companies may find that burning cash or taking out debt for buybacks simply aren’t worth the cost.


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