Tech Giants Embrace Stock Buybacks: Its Impact on ETFs

Critics argue that buybacks can be used to manipulate share prices, contribute to excessive executive compensation, and limit cash available for investment opportunities, thereby sacrificing growth and profitability. However, Guest's research comparing companies that repurchase shares with those that don't has found no significant evidence supporting these criticisms.

Share repurchases, or buybacks, are when a company uses its cash to buy back some of its outstanding shares from the market. This reduces the number of shares in circulation, which increases the ownership stake of existing shareholders and boosts the earnings per share (EPS) ratio.
Guest suggests that stock buybacks offer more flexibility than dividends, as they can be temporarily cut during downtime and reduce the potential for cash misuse on management's pet projects. Additionally, repurchased shares can be used to compensate employees, offering benefits other than improving long-term profitability or creating additional investment opportunities.

Along with Ali Ragih, a VerityData analyst, we also believe that the best time for buybacks is when the company's valuation is low, as they get the most value for their buyback. For example, if Google spends $15 billion on buybacks, a lower stock price would yield more shares for the same dollar value. Companies with high free cash flow and limited investment opportunities, like Alphabet, are well-positioned for buybacks.

We all know that the tech shares were battered massively last year due to rising rates and their valuations got corrected. This opened up opportunities for them to go for solid buybacks this year. According to a recent report by S&P Dow Jones Indices, tech companies accounted for 28.8% of all buybacks in the third quarter quarter of 2022 versus Q2 2022's 32.8% and Q3 2021's 28.2%.

Any Caveat?
With increasing backlash against buybacks, shareholders may see fewer of them in the future if disincentives increase or restrictions are imposed. In his State of the Union Address in early 2023, U.S. President Joe Biden will urge Congress to pass a 20% minimum tax on billionaires and increase the new 1% tax on corporate stock buybacks to 4%, the White House said.
This could lead to firms retaining cash or switching to dividends, which may have negative consequences, such as higher taxes on dividends compared to repurchases that generate capital gains.