Many investors have strong opinions on stock-buyback initiatives. Some shareholders like their companies removing shares from the table, which can boost per-share earnings over time. Others are adamant that a company's cash should be used more wisely than buying its own stock, to fund areas such as research and development that can help fuel long-term growth. Given the debate around buybacks generally, and since there are other factors that determine if such initiatives make good business sense, should (ADBE +0.90%) current efforts to reduce share dilution make investors happy?
Image source: Adobe Systems.
A year for the ages
It's been a stellar 2017 for Adobe shareholders, considering the company's stock price is up 30% year to date, and for good reason. Longtime fans of Adobe may recall that three years ago, CEO Shantanu Narayen implemented a new initiative to offer Adobe's industry-leading design software and related solutions strictly on a monthly-subscription basis.
Customers were not enamored with the new subscription-based business model, to put it mildly. But today those same customers, and a host of new users, have helped Adobe grow its annual recurring revenue (ARR) to an astounding yearly run rate of $4.25 billion by the end of the first quarter.
Adobe's relatively reliable revenue foundation, built from its ARR, has driven record quarterly sales results. Last quarter, revenue skyrocketed 22% to $1.68 billion, of which $1.38 billion was from ongoing ARR subscriptions.
Heading into 2017 Adobe was already flying high, which was the impetus for the board of directors to sign off on a $2.5 billion stock-buyback plan between now and 2019. The new initiative replaces the existing $2 billion share-repurchase plan that was set to expire at the end of this year. Unfortunately, now simply isn't the right time.
The best of intentions
In the first quarter of this year, Adobe repurchased 2.2 million shares, "returning $238 million of cash to stockholders." That sounds good, but there's a time and place for everything. The reason investors shouldn't be happy about Adobe's buyback plan is that its stock price has been bumping up against, or setting new, 52-week highs for much of 2017.
In other words, Adobe is buying its own shares at or near historically high valuations. Make no mistake, Adobe is still a strong buy over the long haul for relatively conservative investors who appreciate its stable ARR results. But it's going to be a long while before shareholders benefit from Adobe's current repurchase efforts, let alone the $2.5 billion worth in the coming two years.
Big Blue has it right
Fellow tech-industry stalwart IBM (IBM +2.74%) also has a large buyback initiative of some $3 billion in place, and that's on top of an earlier $3 billion approved by the Board. The thing is, as IBM meanders its way through a transition to up-and-coming markets such as the cloud, cognitive computing, and data security, its stock price has taken something of a beating.
When a company like IBM institutes a large stock-repurchase effort while stock prices are beaten down, it shows confidence from management that they fully intend on turning things around. And when that happens, IBM's nearly 17 million fewer shares on the open market today, compared to a year ago, will pay off handsomely for shareholders.
But the current situation at IBM is a far cry from Adobe's strong execution and corresponding stock-price gains. While Adobe's notion is a sound one, its stock-buyback efforts simply aren't benefiting shareholders today, and it will be a long time before they do.
