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Microsoft's History of Share Buybacks

Microsoft (NASDAQ: MSFT  ) announced a new $40 billion share buyback program yesterday. This replaces an old $40 billion buyback authorization set to expire later this month. The new buyback program has no expiration date, though such plans are often canceled or altered.

Is this good news for shareholders? Likely. Microsoft shares are cheap, the company has more cash than it knows what to do with, and buybacks are a tax-efficient way to reward shareholders.

But with all share buybacks, there's a catch.

Corporate managers from across industries have a dreadful history of implementing share buybacks. They ramp up buybacks when shares are expensive and pull away when they become cheap. This is the opposite of what long-term shareholders should want, and ultimately becomes a subsidy for exiting shareholders at the expense of loyal long-term owners.

 I checked out Microsoft's history timing share buybacks. Have a look:

Source: S&P Capital IQ.

It's a mixed bag.

Buybacks ramped up in 2002 as shares fell. Good.

They ramped up even more in 2006 and 2007 as shares boomed. Meh.

Then buybacks virtually ceased in early 2009 as shares crashed to multiyear lows. Not smart.

They ramped up again as shares remained cheap in 2010. Good.

Digging deeper into Microsoft's annual reports shows a remarkable consistency. Through all the ups and downs, Microsoft's average price paid for each share repurchased has been between $25 and $30 for the last 10 fiscal years:

Sources: Company filings and author's calculations.

Shares currently trade at around $33, so the average return on investment for Microsoft's repurchase has been fairly low. But, hey, it beats cash in the bank. 

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Comments from our Foolish Readers

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  • Report this Comment On September 19, 2013, at 10:20 AM, slpmn wrote:

    It's clear to me that share buybacks help companies reduce the dilutive impact of executive stock grants and stock options, which is obviously one reason they do it.

    What isn't clear to me is how they "reward shareholders". SInce they're buying at the market price, it only gives cash to shareholders who want to sell and could have sold to any other buyer in the market at the same price. No benefit there. In theory, value should go up because the cash on the balance sheet isn't adding value to a company like Microsoft, so using it to reduce the number of shares outstanding should be a net win. But as your chart shows, it is tough to see any correlation between buybacks and share value. Now, if there weren't massive amounts of stock grants and options to offset, I think you would see more of a correlation because instead of holding EPS steady, EPS would increase with a buyback, which would add value.

    The more direct way to reward shareholders is with dividends, and I know Microsoft does have a decent dividend. However, it could be $40 billion larger. Now that would be a direct boon to shareholders because instead of cash sitting on the balance sheet adding no value, it would be transferred to my pocket. And, I would still own the stock. i wouldn't have to sell it to see a return.

    This is one of those areas where I think a theory that makes some intuitive sense (buybacks) is, in practice, not really all that beneficial to shareholders. Corporations have latched onto it as a way to continue enriching their executives (by pumping out stock grants and options) while covering up the impact in the marketplace. And then trumpeting it as being something they do for the shareholders. The market understands this, and that's why you don't see any bump in the share price at the announcement. Contrast that with what would happen if MSFT announced a special one-time $40 billion dividend distribution. So which move actually creates shareholder value?

  • Report this Comment On September 20, 2013, at 1:38 AM, AgeOfRobots wrote:

    @slpmn - Excellent points.

  • Report this Comment On September 23, 2013, at 1:17 PM, Waseem80 wrote:

    Right and wrong. Shares outstanding for MSFT dropped from 10.894 Billion to 8.47 Billion in last 10 years. Buybacks did return some significant cash back to shareholders tax-free.

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