Apple and Microsoft: Moving Opposite on Share Buybacks?
Zacks Equity Research
Updated
Apple Inc. AAPL and Microsoft Corp MSFT, pioneers of two completely different eco-systems – iOS and Windows – are apparently moving in opposite directions regarding share buybacks as well.
Per latest data from S&P Dow Jones Indices (S&P DJI) Apple’s spending on share buyback declined to $6 billion in third-quarter 2016 as compared with $10.2 billion in second-quarter 2016. On the contrary, Microsoft’s spending increased to $4.4 billion sequentially in the reported quarter.
Although Apple’s spending rate declined, the company still spent the most on share repurchases, trailed by Microsoft. General Electric GE came in third with $3.7 billion spending followed by pharma company Allergan AGN, which spent $2.7 billion.
Banking giant Citigroup C, a Zacks Rank #2 (Buy) stock, rounded off the top five in the S&P 500 list. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Apple & Microsoft: Both Aggressive Buyers
Since inception of its capital return program in 2012, Apple has been an aggressive buyer of its shares. The company has already utilized $133 billion of $175 billion (up from $140 billion) authorization for the purpose. As of Sep 24, 2016, only $42 billion of the authorized amount was available with the company.
APPLE INC Price and Consensus
APPLE INC Price and Consensus | APPLE INC Quote
However, it’s not clear whether Apple will persist with its aggressive stance in share buybacks going forward. The company’s declining iPhone sales and headwinds related to iPad and Apple Watch is a concern related to its cash flow generation abilities. Moreover, increasing investments in fast growing emerging technologies can hold back the company from spending aggressively on share buybacks in 2017.
Microsoft has also been one of the most active companies in the market in terms of share buybacks. Over the last three fiscals (2014, 2015, 2016) the company spent a total $34.4 billion on buying 764 million shares.
Notably, in September, Microsoft announced plans to repurchase $40 billion worth of shares by the end of 2016. The stock repurchase program represented nearly 9% of Microsoft’s total market capitalization of $442.7 billion (as of Sep 21).
MICROSOFT CORP Price and Consensus
MICROSOFT CORP Price and Consensus | MICROSOFT CORP Quote
Liquidity: Growth Driver of Share Buybacks
Ample liquidity of both Apple and Microsoft has been primarily responsible for aggressive share buybacks over the years.
As of Sep 24, 2016, Apple’s cash & cash equivalent amounted to $237.59 billion, of which almost $216 billion were held by foreign subsidiaries. Moreover, the figure improved significantly from $155.24 million reported at the end of fiscal 2014.
APPLE INC Cash and Equivalents (Quarterly)
APPLE INC Cash and Equivalents (Quarterly) | APPLE INC Quote
Apple’s strong liquidity was also reflected by the improvement in its current ratio that was up from 1.11 at the end of fiscal 2015 to 1.35 at the end of fiscal 2016.
On the other hand, Microsoft’s cash and cash equivalents amounted to almost $137 billion as of Sep 30, 2016, of which $111.1 billion were held by foreign subsidiaries. Further, the figure improved significantly from $85.71 billion posted at end of 2014.
MICROSOFT CORP Cash and Equivalents (Quarterly)
MICROSOFT CORP Cash and Equivalents (Quarterly) | MICROSOFT CORP Quote
Moreover, Microsoft’s current ratio has improved to 2.69 as of Sep 30, 2016 as compared with 2.47 at the end of Sep 30, 2015.
Positive Impact on Share Prices
Share buyback that amounts to lower shares outstanding always have a positive effect on the bottom line, which eventually drives up share prices.
We note that Apple shares have gained 60.35% in the last four years as compared with the Zacks Computer Mini Industry’s return of 34.5%.
Over the same period, Microsoft has gained a massive 136.91% as compared with the Zacks Computer Software Industry’s return of 67.6%.
Favorable Tax Regime to Boost Buybacks
During campaign, the President-elect Donald Trump had called for a repatriation holiday of 10%. In fact reducing corporate taxes has been an integral part of his agenda. Trump had proposed to bring down corporate tax rate to 15% from the current 35%.
Reportedly, the U.S. companies are hoarding $2.6 trillion in cash overseas equivalent to almost 14% of the total U.S. gross domestic product. Both Apple and Microsoft have been named as the leading companies with hoards of cash stacked abroad.
We believe that a probable overhauling of the corporate-tax under Trump will encourage these companies to repatriate cash in 2017. This will further improve liquidity which will definitely boost spending on share repurchases going ahead.
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