For long-term investors, the past eight years have truly been something special. Whereas the stock market has historically increased in value at a rate of 7% annually, inclusive of dividend reinvestment, the average annual return of the S&P 500 since the March 2009 low has been well over double that rate.
But it's not just the big gains that investors are relishing. Capital returns have also been way up since 2009. According to data from Bloomberg of companies in the S&P 1500 Composite Index, total capital returns, which includes dividends and stock buybacks, have more than doubled over the past eight years to around a combined $250 billion per quarter.
Stock buybacks take center stage
As should be no surprise, the aggregate value of corporate share buybacks has outpaced the dollar value of corporate dividend payouts in practically every quarter. Common stock repurchases have been a particularly popular tool for publicly listed companies over the past eight years as interest rates have remained near historic lows. This has allowed businesses to borrow cheaply, but it's also made it unattractive to buy interest-bearing assets. The solution? A number of companies with excess cash on their books have turned to share buybacks, allowing them to use their cash to lower their outstanding share count and potentially lift their earnings per share. A lower price-to-earnings ratio could help lift a company's share price by making it look more fundamentally attractive.
According to Bloomberg, four companies have combined over the past decade to repurchase a whopping $563 billion worth of their common stock. Let's have a quick look at these stock-repurchase giants and see if their efforts to create value made sense.
ExxonMobil: (almost) $180 billion
When talking about the king of corporate buybacks over the past decade, no company has shelled out more for its own common stock than integrated oil and gas giant ExxonMobil (NYSE:XOM). Bloomberg pegs the company's share repurchases at nearly $180 billion in that span. Over that time, ExxonMobil's outstanding share count has reduced from almost 5.6 billion shares to less than 4.2 billion.
You might be under the impression that ExxonMobil's share repurchases are meant to appease investors who've struggled with a substantial drop in crude oil prices since 2014, but that's not the case. The company's share repurchases tend to be tied to the price of crude oil. When crude hit triple digits per barrel, ExxonMobil had more than enough extra cash to devote to share repurchases. With crude currently valued at less than $50 a barrel and margins way down, share repurchases have typically been coming in at less than $1 billion a quarter for the past two years.
Thus we have a conundrum for the oil giant. Share repurchases make the most sense when it has tons of extra cash flow, but considering that oil company valuations tend to move in step with the price of crude, it means ExxonMobil has a tendency to repurchase the bulk of its stock near its highs. That's not a very efficient use of capital, and it could explain why ExxonMobil has underperformed the S&P 500 by 73 percentage points over the trailing decade.
Apple: $150 billion
Surprise! A company with more than a quarter-trillion dollars in cash on its books (OK, so nearly all of it is overseas) is among the most aggressive when it comes to share repurchases.
Apple (NASDAQ:AAPL), which is no stranger to announcing massive capital-return programs, has repurchased $150 billion worth of its common stock since 2013. That's right, folks: Apple didn't even begin aggressively acquiring its stock until four years ago. Since the end of 2012, Apple's outstanding share count has dropped from 6.6 billion to less than 5.4 billion. And the buybacks appear to be helping, with Apple's stock valued near an all-time high.
The chances Apple will continue to be a regular purchaser of its shares seems decent, but we may see a slowdown in the aggressiveness with which Apple rebuys its stock soon enough. Apple's core businesses aren't the issue. The expected launch of the iPhone 8 in the coming months should be huge for the company, and Apple has among the most loyal customers on the planet. The issue is that Apple has utilized debt to fund its share repurchases, and it's now lugging around nearly $99 billion in debt on its balance sheet. Even with almost $53 billion in free cash flow over the trailing 12 months, Apple will probably want to address its debt first before going gung-ho on future buybacks.
Microsoft: $117 billion
Tech giant Microsoft (NASDAQ:MSFT) has also been busy in the buyback department, having repurchased approximately $117 billion worth of its shares over the past 10 years.
For the longest time, Microsoft's stock was stuck in a trading range. Yields were low following the Great Recession, which meant little interest in investing its cash hoard, and the company's history of creating value throughout acquisitions has been spotty at best. Purchases of Skype, aQuantive, and Nokia's handset business have all qualified as flops compared with initial expectations. Thus, repurchasing its shares made sense by boosting EPS and making the already inexpensive software giant appear even cheaper. Since the end of 2007, Microsoft has lowered its share count by a tad over 2 billion shares, or slightly more than 20%.
How's that worked out for shareholders? Pretty well, I'd say. Microsoft aggressively rebought its shares throughout the Great Recession, and even during its minor swoon in 2015. Recently, shares of the company have traded at an all-time high. With the Windows operating system still generating high-margin profits for the company, and Microsoft's Azure cloud platform carving out its space, regular share buybacks are icing on the cake for its shareholders.
IBM: $116 billion
Last, but certainly not least, IBM (NYSE:IBM) has racked up an impressive $116 billion worth of share repurchases over the past decade. Considering that IBM has generated between $16.1 billion and $20.7 billion in operating cash flow every year since 2007, it's certainly had the funds to go around.
However, IBM's focus on capital returns has less to do with weaker asset yields and more to do with weakness in its legacy businesses. IBM was late to the game in its efforts to focus on cloud computing. While it's been playing catch-up and is seeing substantial cloud growth, its legacy hardware and software businesses still account for the bulk of its revenue. In the company's recently reported second-quarter results, total sales fell by more than 4%, marking the 21st consecutive quarter that Big Blue's year-over-year sales dropped.
How's management to keep shareholders happy while the company exacts another multi-year turnaround effort? Simple: Boost capital returns. In addition to a healthy dividend yield of nearly 4%, IBM has pretty steadily repurchased its common stock over the past decade. However, its biggest buys appear to have to come with its stock trading at $175 or higher, meaning IBM's share-repurchase program hasn't had its desired impact, despite reducing its share count by a third over the past decade.
While Big Blue remains an intriguing income play, it's clear that the company has a long way to go to right the ship.