The year 2020 was a time of opportunity for both the tech industry and its investors, but eventually, all good things come to an end, and this time will not be an exception – or will it?
There is no doubt that giants like Amazon, Apple, Intel, Microsoft, Zoom and Alphabet have made a ton of money out of the lockdown measures, but as economies reopen, inflation fears grow, and investors start to move out of mega-cap growth stocks and into cyclical companies.
The question then arises, what can companies do to raise or at least preserve the value of their shares? The answer is quite simple – create shareholder value. In particular, make acquisitions that maximize expected value, even if doing so will hit near-term earnings.
Thus it shouldn’t be a surprise that the value of global mergers and acquisitions reached US$3.6 trillion in 2020. In many of these deals, the acquiring company used its stock as the main currency, leveraging rising stock markets.
The second option is to return cash to shareholders through dividends and share buybacks when there are no credible value-creating opportunities to invest in the business. This allows companies to reduce the cost of capital, consolidate ownership, inflate important financial metrics, and even free up profits to pay executive bonuses.
A combination of the positive economic outlook and excess of cash has pushed companies to launch new share-buyback programs.
In total, US companies announced $484 billion in share buybacks in the first four months of this year. Goldman analysts project that share repurchases by US companies will increase by 35% this year from 2020. In the case of Europe, Société Générale SA expects that companies will spend €150 billion ($180 billion) to purchase their own shares over the next year.
It is worth mentioning that tech companies are not the only ones announcing multibillion-dollar repurchase plans. Banks are also eager to return to the practice as the US Federal Reserve loosens pandemic-era restrictions on returning cash to shareholders.
How can investors benefit from the buyback bonanza? When a company repurchases its shares, their value increases as the percentage of ownership by each investor grows by reducing the total number of outstanding shares. Also, sometimes buybacks are better than dividend payments as shareholders receive the opportunity to defer capital gains if share prices increase.
As an example, we can look at Warren Buffett’s Berkshire Hathaway, which bought back a record amount of company stock last year. The total 2020 repurchase amounted to $24.7 billion. No surprise – its stock value increased by more than 60% in the last six months. Investors, meanwhile, didn’t have to do anything and earned an additional proportion of the funds.
Repurchase programs announced by big players like Apple and Google will also have a positive effect on the market as a whole, because of their stake in the indices.
If you don’t have time to follow buyback news you can always invest in exchange-traded funds (ETFs) like iShares US Dividend and Buyback, which seeks to track the investment results of an index composed of US stocks with a history of dividend payments and/or share buybacks.