Certain companies should not do stock buybacks. Take Amazon.com, Inc. (NASDAQ:AMZN). It hasn’t repurchased its shares since the first quarter 2012 when it bought back $960 million at $181.13 a share.
In case you’re wondering, that’s a 765% return (43.3% compounded annually) on its investment. You’d think with a return like that, Jeff Bezos would be buying AMZN stock with both hands. Nope, not a cent, but here’s a scarier fact:
Amazon paid 17% less per share for its 2012 stock buybacks than the midpoint of its stock price that year — high of $264.11 and low of $172.00 — so it did an exceptionally good job timing its purchases. Think that’s a fluke? In 2011, it paid $277 million ($184.67 per share) to buy back its stock. The midpoint in 2011 was $203.65 — high of $246.71 and low of $160.59 — which means Amazon paid 9.3% less its midpoint that year, another good job buying back its stock.
In the six years since its last stock buybacks, Amazon has averaged an annual total return of 45%. It’s almost as if the brain trust in Seattle knew its stock price was going to increase almost 800% over the next six years.
Jeff Bezos instinctively knew that capital allocation levers such as stock buybacks are best pulled only on special occasions.
Here are seven other companies who shouldn’t do stock buybacks regularly.
Companies Who Shouldn’t Do Stock Buybacks: Netflix (NFLX)
Netflix, Inc. (NASDAQ:NFLX) stock continues to go up in value despite detractors saying its business model is a House of Cards ready to collapse on the weight of all the expensive content it buys each year.
The reality is that Netflix is riding a secular trend that’s got plenty of room left to run despite what the naysayers think.
As I stated in January, Netflix had an operating profit per subscriber of $1.50. Today, based on its Q1 2018 operating profit of $447 million, that number’s over $14 per subscriber on an annualized basis. That is why its stock price keeps going higher.
Year to date through April 30, NFLX stock is up 63% on top of a 55% total return in 2017. I expect it to continue moving higher as it pulls in more international memberships.
In the first quarter, Netflix had 63.8 million paid members, 10.4% higher than in Q4 2017, and 42% higher than a year earlier. The company is forecasting 125 million paid members at the end of the second quarter, 5% higher than in the first quarter.
Considering U.S. membership increases have slowed, that’s amazingly healthy overall growth. With its stock likely to hit $400 by sometime in 2019, stock buybacks should not be on Reed Hastings’ radar.
Companies Who Shouldn’t Do Stock Buybacks: Adobe (ADBE)
Acquisitions are the lifeblood of the tech world. Companies like Adobe Systems Incorporated (NASDAQ:ADBE) grow by buying other companies, either for their technology or talent — sometimes both.
In April, Adobe made two acquisition announcements.
First, on April 16, it announced that it acquired Sayspring, a startup that helps developers create the voice interfaces for personal assistants such as Alexa. Voice integration is going to be a big part of Adobe’s future (any tech company for that matter) so bringing Sayspring’s team along with the technology is a big deal.
Secondly, it acquired URU on April 27, an AI startup that inserts logos into videos as if they were meant to be product placements or part of the original video. It’s many steps beyond AdSense.
With Adobe generating almost $3 billion in free cash flow annually and its stock trading at 35 times cash flow, acquisitions make a lot more sense than buying back its stock.
Companies Who Shouldn’t Do Stock Buybacks: Nvidia (NVDA)
However, that cuts both ways. Stock prices sometimes do go down.
Nvidia generated $2.9 billion in free cash flow in 2017 with stock buybacks accounting for 31% of that. By comparison, it only paid out $341 million in dividends. That’s not a good thing when stock-based compensation for the last year was $391 million, greater than the dividends paid out to owners.
I’m not suggesting that Nvidia shouldn’t compensate its employees well, but it might want to divert some of its stock buybacks — it’s trading at 40 times cash flow — to a higher dividend.
Yes, it’s a growth stock, but it opened the dividend door back in 2012 when it started paying one.
Companies Who Shouldn’t Do Stock Buybacks: Mastercard (MA)
All of the companies that are on this list were selected because their one-year returns are greater than their three-year returns (annualized) and they are up year to date.
Mastercard Inc (NYSE:MA) is no exception up 18% year to date through April 30 with a one-year return of 54% and a three-year annualized return of 26%.
In 2017, Mastercard repurchased $3.8 billion of its stock at an average of $126.67 a share. While it did a good job buying back its stock — the midpoint of the high and low for the year was $129.33 — it allocated close to 75% of its free cash flow to doing so.
Over the last three years, it’s averaged approximately $3.6 billion a year while its long-term debt’s increased by 66% to $5.4 billion.
Trading at 34 times cash flow it ought to be paying down some of that debt over share repurchases.
Companies Who Shouldn’t Do Stock Buybacks: Intel (INTC)
“Intel and Microsoft are reigning supreme here,” Cramer said on CNBC April 27. “It’s eerily reminiscent of the way things were 20 or 30 years ago when both companies struggled to meet the insatiable demand of their [consumers].”
While investors have been lapping up NVDA stock, Intel stock’s actually been performing very well for shareholders, up 12% year to date through April 30; 46% over the past 52 weeks; and 19% on an annualized basis for the last three years.
Not to mention it’s delivering excellent results suggesting Cramer’s not too far off the mark with his assessment of the two granddaddies of tech.
“The company had a really good quarter and it looks like the company will keep reporting really good quarters into the foreseeable future given improving growth prospects in critical high-value markets like data centers and IoT,” wrote InvestorPlace’s Luke Lango April 30. “At current levels, INTC stock looks dirt cheap considering those improving growth prospects.”
Considering how Intel is performing as a business right now, ten times cash flow is not expensive.
However, in fiscal 2017, Intel spent $14.5 billion on acquisitions and $15.5 billion the year before, five times what it spent in stock buybacks.
Given Intel is growing once again, I believe $6 billion is better allocated to acquisitions or investing in the business despite its stock’s relative value.
Companies Who Shouldn’t Do Stock Buybacks: Boeing (BA)
The move combines KLX’s Aerospace Solutions Group with Aviall, Boeing’s current parts and services business, providing its customers with a one-stop shop for airplane parts and service.
“Our customers have long desired a supplier who could offer essentially 100 percent of their requirements for fasteners, consumables and expendables,” stated Amin Khoury, KLX Chairman and CEO. “The combination of Aviall and KLX Aerospace facilitates the broadest scope of parts and products to support all customer fleet types for the commercial, military and defense and business and general aviation markets.”
Boeing could have used the $4.3 billion to buy back more stock losing out on an opportunity to add value to its customers but it wisely chose to do the deal.
Over the last three years, Boeing has repurchased $23 billion of its stock using 87% of its free cash flow to do so.
It doesn’t need to do any more stock buybacks to deliver value for shareholders. A higher stock price will do just fine.
Companies Who Shouldn’t Do Stock Buybacks: Microsoft (MSFT)
Microsoft announced a new $40 billion stock repurchase program in December 2016. At the end of March, Microsoft had made almost $10 billion in stock buybacks over the past 15 months.
In the first nine months of 2018, Microsoft repurchased 78 million of its shares at an average price of $83.33 a share. The high and low for these nine months was $97.24 and $68.02 respectively for a midpoint of $82.63, just slightly below the average price it paid for its shares.
Not an egregious job of buying back its stock but it’s certainly not adding value for shareholders — 13% appreciation of its shares over the average price paid — who should expect Microsoft to do a better job spending shareholder cash.
CEO Satya Nadella’s $56 million in compensation over the last three years not including the actual gains from vested shares is significant.
Even though Nadella has done a good job resurrecting Microsoft, the level of his compensation warrants the company doing a better job buying back its stock because it’s all about the optics.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.