Bulls Bet Megacap Stocks Primed For Buyback Boost

Bulls hoping the Nasdaq 100’s best day since August is the start of a meaningful rebound may be about to get a boost from a long-standing ally: tech companies themselves.

(Bloomberg) — Bulls hoping the Nasdaq 100’s best day since August is the start of a meaningful rebound may be about to get a boost from a long-standing ally: tech companies themselves.

Led by the likes of Apple Inc. and Microsoft Corp., Big Tech has for years been among the most extravagant spenders on their own stock, often to reduce dilution as new shares issued for compensation hit the market. The six biggest tech firms that repurchase shares have more than $250 billion set to deploy, from existing programs or ones authorized this year, according to data compiled by Bloomberg. 

But a big chunk of that went unused, as the pace of buybacks slowed in the first half and likely stayed sluggish during the third quarter market rout, according to a recent note from Bank of America Securities. Now, the setup heading into the final three months of the year and the start of 2024 looks promising after cost cutting and growing revenue have left many tech companies flush with cash to deploy. 

That would be a welcome development for tech bulls who’ve watched the Nasdaq 100 shed $1 trillion in market value in the last month.

“The recovery from the profit recession that we saw in 2022 and early 2023 should pave the way to better free cash flow,” said Angelo Zino, a research analyst at CFRA, adding that this would herald a “greater emphases on buybacks.”

Free cash flow for information technology companies in the S&P 500 rose to $86.5 billion in the second quarter from $77.9 billion in the previous period. Communication services companies in the index saw an even bigger boost, jumping to $58.1 billion in the second quarter from $42.5 billion in the first.

Over the past year, companies in the Nasdaq 100 that returned capital to shareholders only by buying back their stock — rather than paying dividends — had a median gain of 26%, according to data compiled by Bloomberg. That beat out companies that bought back their shares and paid a dividend, those that only paid a dividend and those that didn’t do either.

Meta has spent nearly $10 billion on buybacks in the first half of 2023, helping to fuel the stock’s 151% climb. The social media giant had $41 billion available and authorized for more repurchases, as of June 30. Alphabet Inc. has stepped up buybacks from last year, with about $30 billion in shares repurchased so far in 2023 as the stock’s gained 53%. The company expanded its repurchase authorization by $70 billion in April. 

“This kind of environment suggests that companies buying back their stock will outperform,” said Jim Polk, head of equity investments at Homestead Advisers. “If you’re looking for growth, you’d rather they not use the capital on a dividend.”

That’s exactly what Nvidia Corp. did in August when it pledged an additional $25 billion to share repurchases amid soaring profits. The chipmaker, whose shares have tripled this year, hasn’t raised its 4 cent per share dividend since 2018. 

Read more: Nvidia Cash Geyser Can Cover Buybacks and Vital R&D: Tech Watch

“It can either buy back stock or raise the dividend,” Polk said. “To me, the buyback might make the most sense out of those. It’s a good problem to have.”

Tech Chart of the Day

With earnings reporting season closing in, Netflix Inc.’s year-to-date stock performance is beating video streaming peers with a 27% gain. Warner Bros Discovery Inc. is a distant second with an 8% rise, while Walt Disney Co. and Paramount Global are both down in the same period.

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–With assistance from Ryan Vlastelica, Tom Contiliano and Rheaa Rao.

(Updates stock moves at market open)

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