Last night, Microsoft (MSFT) announced that they will be replacing their existing $40 billion share repurchase agreement (that should be completed this year) by another $40 billion buyback plan. While that is a dazzling headline, the timing isn’t a total surprise since if they were going to do it, it makes sense to announce prior to the completion of the current plan and with some time before the company’s scheduled shareholder meeting on November 30th. The stock is a stone’s throw away from its Y2K all time high, and just a few months after their $26 billion all cash bid for money losing (GAAP) LinkedIn (LNKD). You could be forgiven for thinking things are getting a bit weird in the current market cycle.
To put MSFT’s performance in some context (as I wrote the other day) maybe they have earned the right to do whatever they like with their cash:
Thirty years ago, in March 13th, 1986, a little company named Microsoft (MSFT) went public. Split adjusted the IPO price was below 10 cents!. At the time the Nasdaq Composite (CCMP) was trading very near 300. MSFT has risen 65,000% since, the CCMP has risen 1500%. Yet the two charts look identical:
MSFT vs Nasdaq since March 1986 from Bloomberg
Think about how much poor performance by thousands of publicly traded companies has been masked over the last three decades stocks like MSFT.
On the cash return front, it all started for MSFT in the summer of 2004 when the company announced a $75 billion plan, a one time special dividend of $32 billion, an annual dividend of $3.5 billion and $30 billion of buybacks over a 4 year period. Since that announcement the stock has doubled, but has lessened its float by nearly $45 billion in the last 5 years alone, and about $125 billion since 2004, with dividends including the special likely near $100 billion, all resulting in a current $445 billion market cap.
That’s truly remarkable. But it leads me back to a thought I had earlier in the week. MSFT’s share gains mask a ton of poor performance and bad financial results in the broad market. But what has behind most of those gains and is it healthy? Consider this fun-fact from FactSet:
137 $SPX companies spent more on buybacks in TTM ending in Q2 than they generated in earnings. https://t.co/SwJDhKvXCZ pic.twitter.com/dKlfBNHmSX
— FactSet (@FactSet) September 21, 2016
Companies like Microsoft (and Apple for that matter) are massive contributors (culprits?) on this front. MSFT’s trailing 12 month buybacks were nearly $15 billion vs $16 billion in net income for the same period, and that excludes dividend payments of nearly the same amount ($1.77 x 7.8 billion shares outstanding).
These companies are generating shit tons of cash, giving most back to shareholders and raising debt at record low levels to maintain healthy debt to equity ratios. Obviously, this behavior is encouraged by the interest rate environment we are in. But it’s also resulted in some fairly goofy choices when it comes to spending cash from a cash cow.