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Will 2021 Be a Year of Record High Stock Buybacks?

By Matthew Frankel, CFP® - Updated Jun 23, 2021 at 9:30AM

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Companies pumped the brakes on buybacks last year, but that should change.

Many companies slowed down or stopped their buyback programs entirely in 2020 due to the COVID-19 pandemic. As the world starts to get back to normal, many are now sitting on piles of cash and could start putting it to work. In this Fool Live video clip, recorded on May 17, contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why 2021 could actually be a record year for buybacks. 

Jason Moser: As such, a lot of these companies are starting to spend more on dividends and they're really starting to buy back more of their stock than they have been over the last year or so. It feels like stock buybacks are neither right nor wrong. They just are, and we can just discuss whether you like them or hate them until the end of time. But what do you think when you see news like this? I don't know. I mean, there's one part of me that wishes companies would take this money that they're using for buybacks and figure out new ways to invest that cash. But by the same token, those investment opportunities aren't always so obvious. They don't grow on trees.

Matt Frankel: Yeah, I mean, theoretically, a buyback should be a great use of a company's cash if they're doing right by their shareholders. The idea is you want to buy your shares back at a value that's less than the intrinsic value of the business. This is what Warren Buffett always says. If they could do that, that's great. I don't want to get into a giant philosophical debate over whether buybacks are good or bad. Because they can be good or bad. If your only purpose with buybacks is to boost your share price, or to boost your earnings over time, which in a lot of cases that's what happens, then they're bad. If you're making a real effort to buy back more shares when your stock's cheap and less expensive and really create shareholder value with it, from an investor's point of view, it's good. We are seeing a lot lately. Over half a trillion dollars in buybacks were authorized already in 2021.

Moser: Wow.

Frankel: That's the most in 22 years.

Moser: Holy cow.

Frankel: A lot of it was Apple (AAPL 1.48%). Apple authorized a $90 billion increase to its buyback already this year. That was almost a fifth of it. A lot of companies are sitting on a lot of cash. It's not that they've been hoarding cash for a bad reason, a lot of them pumped the brakes on buybacks during COVID, a lot of them stopped acquiring new businesses, a lot of them stopped capital spending, and things like that. Same thing that's happening with American consumers. If you remember from our bank earnings that savings rates are through the roof as well. Same thing that consumers are doing. It was a responsible behavior at the time last year, given the uncertainty. But now, uncertainty as we rambled on about at the beginning of the show with the face mask things going away, uncertainty is declining. There's really no way to dispute that. Now companies are saying, "Hey, we don't need these giant cash stockpiles, we can get back to business as usual and maintain a reasonable amount of cash to have a good cushion . But we can put the rest of it to work, and shareholders want dividends, shareholders want buybacks. Of course, if there are better opportunities on the table, acquisitions can be a great way to spend money. But if not, shareholders want a lot of that capital returned. You see activist fights over lack of a dividend policy. It's not rare that big shareholders will step in and say, "Wait, you got to pay us now."

Moser: To your point, dividends are lovely because they're cash in the pocket. That always seems to come at a little bit of a price. I look at two glaring examples. You and I were talking back and forth on Twitter (TWTR 1.02%) earlier today about this. You look at companies like AT&T (T 0.68%) and Verizon (VZ 0.48%) over the last five years, two companies that are very well-known for high and consistent dividend yields. They have that opportunity to be able to provide that high yield because they've been your utilities essentially. They have a reliability in the business model that allows them to continue to pay those dividends, but that doesn't necessarily translate into stellar returns for investors. You look at over the last five years between the S&P and AT&T and Verizon, I mean, AT&T and Verizon, you've made money off of those investments, but the total return prices it then incorporates dividends and everything. In return price, those two companies are well trailing the S&P by a lot. The dividends are great, but you still probably would've been better off just being invested in the S&P, and then conversely, when it comes to share repurchases, obviously, you want to make sure that those repurchases are actually bringing that share count down. I think in today's day and age with a lot of these new companies coming public, a lot of tech-based companies, they give out some of those shares as compensation early on because it's a way to afford that work. Those repurchases don't really have that impact on that share count. You look at Apple, the example that you brought up earlier. Apple, with all of the repurchases that they've been making over the last several years, since 2016, their share count's down better than 20%. That's having a real impact on that outstanding share count, which would make everyone's share a little bit more valuable at the end of the day. Just a couple of things to keep in mind there in regard to share repurchases and dividends. Like you said, we could probably sit here and have a philosophical debate about it for an hour, and at the end of the day never really come to a firm conclusion, could we?

Jason Moser owns shares of Apple. Matthew Frankel, CFP owns shares of AT&T and Apple and has the following options: short February 2021 $140 calls on Apple and short May 2021 $140 calls on Apple. The Motley Fool owns shares of and recommends Apple and Twitter. The Motley Fool recommends Verizon Communications and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
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Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
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AT&T Inc. Stock Quote
AT&T Inc.
$18.16 (0.68%) $0.12
Twitter, Inc. Stock Quote
Twitter, Inc.
$44.39 (1.02%) $0.45

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