Last week, I read an intriguing take on NVIDIA Corporation's (NASDAQ:NVDA) buyback efforts written by my colleague, Tim Green. Specifically, Tim made an eloquent argument for why he believes NVIDIA wasted $1.9 billion repurchasing its own common shares over the past two and a half years.
As a longtime NVIDIA investor -- and in the interest of fulfilling the "Motley" part of our company name -- I'm compelled to explore the other side of that argument.
To be fair, keep in mind I bought my first shares of NVIDIA in mid-2010 in the $10 to $12 range. Though I've since bought and sold some shares along the way, I've happily watched as NVIDIA stock has more than quintupled since those early purchases. And the vast majority of those gains has come over the past two years or so.
Consider NVIDIA stock's performance (with and without dividends) compared with that of the broader market since the beginning of calendar year 2014:
So, what's the problem?
As Tim correctly noted, NVIDIA has spent just over $1.9 billion repurchasing its shares since January of 2014, which marked the end of its 2014 fiscal year. Since that time through the end of its most recent quarter, NVIDIA's adjusted diluted share count has climbed from 577 million to 588 million, seemingly indicating the company's massive repurchases were in vain.
Perspective is in order
However, this ignores that NVIDIA technically reinstated its capital returns program in fiscal 2013. And between the beginning of fiscal 2013 and the end of fiscal 2014, NVIDIA astutely repurchased a whopping 70 million shares for roughly $987 million, or $14.10 per share.
In fact, when you collectively view all repurchases made from fiscal 2013 through the first two quarters of fiscal 2017, you'll see NVIDIA has spent just under $2.9 billion to buy back 151 million shares. That's an enviable average of $19.18 per share.
But that also doesn't rule out the possibility that NVIDIA's repurchases since then were wasteful -- until you note it includes 12 million shares repurchased so far this fiscal year for $509 million, or around $42.42 per share -- well below NVIDIA's current trading price of around $60 per share.
What's more, of that total, NVIDIA only spent around $9 million repurchasing shares in its latest quarter, after the value of those shares had truly begun to skyrocket, with the rest of this year's buybacks occurring through an accelerated $500 million repurchase agreement in fiscal Q1. Sure enough, one analyst took note of that relatively small amount allocated to repurchases in fiscal Q2 and asked during the subsequent conference call for clarification on NVIDIA's current view of capital returns. NVIDIA CFO Colette Kress responded:
The return of capital continues to be an important part of our shareholder value message, but remember, it is still two parts of it. Part of it is still dividends, and part of it has been our purchasing of stock. So as we continue to go forward, the dividend is definitely a long-term perspective and we'll make sure that we can watch the dividend yield there to stay competitive, and also looking at our profitability. With our share repurchase, we'll look at the opportunistic time for those repurchases, making sure that we're also doing that carefully as well.
This, combined with the fact that NVIDIA all but halted buyback activity as the stock grew to more lofty levels, indicates that NVIDIA is not only carefully considering its dividend, but also demonstrating a more prudent approach to when and how it pursues share repurchases than its most recent $1.9 billion transaction -- viewed in isolation -- seems to indicate.
Convertible notes and hedges and warrants (oh my!)
This still doesn't explain NVIDIA's stubbornly high share count. For that, we need to look not only at stock-based compensation, but also the effects of note hedges and warrants associated with NVIDIA's move in December 2015 to issue $1.5 billion of 1% convertible senior notes due in 2018.
Regarding the latter, I wrote about that issuance shortly after it was announced in November 2013, noting its primary purpose was -- perhaps ironically -- to fund repurchases under NVIDIA's recently reinstated capital returns program. This also allowed NVIDIA to simultaneously avoid a potentially hefty tax bill it would otherwise incur if it were to repatriate the bulk of its cash held internationally. At the time, though, I also admitted the convertible notes "weren't exactly an obvious choice for a company with such a pristine balance sheet," elaborating that it may have made more sense for NVIDIA to raise cash by issuing traditional debt at a relatively low interest rate (though maybe not quite as low as the convertible notes) "without resorting to such a potentially dilutive solution."
As we already know from Tim's take, NVIDIA's reported diluted share count differs from its adjusted share count because the company entered into a hedge transaction meant to deliver shares to offset dilution from the notes should they be converted. But NVIDIA also entered into a separate warrants transaction that only recently began to negatively affect its diluted share count this past October, after the value of NVIDIA stock soared past the strike price of those warrants (currently $27.04 per share, adjusted for dividends since the original issuance).
As of the end of the second quarter, then, NVIDIA's meteoric rise in share price meant those warrants carried with them a dilutive impact of 31 million shares. If it weren't for that impact alone -- which is variable and based on NVIDIA's fluctuating share price each quarter through the notes' expiration -- NVIDIA's adjusted weighted average shares last quarter would have been 557 million, marking a significant decline from the 617 million diluted shares it had when it reinstated capital returns in fiscal 2013.
Of course, I know we can't ignore the dilutive consequences of those warrants. But it also helps that in the interest of transparency, NVIDIA has even set up a designated "Convertible Notes" section on its investor relations home page with an always up-to-date dilution table to help shareholders do just that.
In the end, considering the combination of that transparency and its track record of buying back shares at reasonable prices, I'm content to trust that NVIDIA's long-term capital returns initiatives are in shareholders' best interests.