Alongside its financial analyst day, memory maker Micron Technology (MU 0.33%) recently announced that its board of directors had authorized a stock repurchase plan good for up to $10 billion of its shares. The company didn't tell investors how quickly it planned to repurchase that stock, however.
As of this writing, Micron's market capitalization -- that is, how much all of the company's shares are worth on the open market -- is nearly $68 billion. This means that Micron's $10 billion stock buyback is good for nearly 15% of the company's total shares outstanding.
That's not all, though. Micron also announced that it intends to return "at least 50% of free cash flow to stockholders beginning in fiscal 2019."
Here's why Micron investors should be huge fans of this move.
Image source: Micron.
Large potential impact to earnings per share
A stock buyback of the size that Micron's board of directors just authorized has the potential to substantially increase the company's earnings per share since it represents such a large percentage of Micron's market capitalization.
As of the company's most recent earnings report, there were 1.238 billion fully diluted shares of Micron outstanding. A $10 billion buyback at the current stock price would reduce that by around 168 million shares. To illustrate the impact that this could have on Micron's earnings, note that last quarter Micron generated diluted earnings per share of $2.67.
If Micron were to buy back $10 billion worth of stock at current prices, the very same net income that Micron generated last quarter would've yielded earnings per share of $3.09 -- a 15.8% increase!
This buyback has the potential to deliver a huge improvement to the company's already impressive earnings per share. Note, however, that the buyback plan is an authorization to spend that much, not a guarantee that it will.
More shareholder-friendly policy
Although I love the $10 billion buyback, what I'm an even bigger fan of is the company's new capital allocation policy by which it intends to return 50% of its free cash flow to shareholders.
Now, Micron's free cash flow could prove volatile. The company's enormous profits are highly dependent on the boom in the DRAM market (DRAM, a type of computer memory used in virtually all computing devices, made up 71% of the company's revenue last quarter) and DRAM has been prone to violent boom/bust cycles. However, if we assume that Micron will continue to throw off significant free cash flow in the years ahead (hey -- maybe it is different this time?), this policy could be huge for stockholders.
By allocating a large percentage of its free cash flow to shareholder returns via stock buybacks (though I wouldn't be surprised to see Micron start paying a dividend some day), Micron can consistently bring down its share count and keep amplifying its earnings per share as a result. That's ultimately nothing but good news for Micron's stockholders.
Investor takeaway
Ultimately, I view shareholder return policies as ways to sweeten the deal -- a stock buyback, even a large one, isn't going to get me to buy a stock that I otherwise wouldn't consider, nor would the lack of a good shareholder return policy keep me from buying a business that I really believed in.
Nevertheless, when used appropriately, significant stock buyback and/or dividend programs that return a large portion of a company's free cash flow to shareholders can help make investors in a company richer.
Well done, Micron.
