When a company is highly profitable, it sometimes accumulates a pile of cash so large that it can't effectively reinvest it in the business. Therefore, it chooses to return money to shareholders instead.
It can do so by paying a cash dividend or initiating a share repurchase (buyback) program. A buyback involves the company taking a sum of money (usually approved by its board of directors) and buying its own shares in the open market, just like any other investor. This shrinks the number of shares in circulation, organically increasing its price per share.
Here's how it works
If a company has 1 billion shares in circulation and trades at a price of $100 per share, it is worth $100 billion. If it spends $10 billion repurchasing its own stock, it could buy 100 million shares, reducing its share count to 900 million.
But that doesn't change the underlying value of its business. Therefore, to maintain a $100 billion market capitalization, its stock price must organically rise to $111.11 to compensate for the smaller number of shares in circulation.
Every remaining investor is now better off because of the higher stock price.
Image source: Getty Images.
The largest technology companies in the world have done buybacks in 2023
Apple (AAPL 1.27%), Microsoft (MSFT 0.37%), Meta Platforms (META -0.52%), and Google parent Alphabet (GOOGL 0.55%) (GOOG 0.74%) are all highly profitable companies, and they've each spent billions of dollars buying back their own shares this year.
Here's how much they allocated to buybacks in the recent quarter alone:
- Apple spent $19.6 billion on buybacks in its fiscal 2023 third quarter (ended April 1), equivalent to about 0.7% of its outstanding shares. Apple's board of directors also authorized a brand-new $90 billion buyback program.
- Microsoft spent $4.9 billion on buybacks in its fiscal 2023 third quarter (ended March 31), which was equivalent to about 0.2% of its outstanding shares. The company refreshes its buyback program every three years; it last authorized $60 billion in fiscal 2022, so this current program will end in fiscal 2025.
- Meta Platforms spent $9.2 billion on buybacks in the first quarter of 2023 (ended March 31), equivalent to about 1.7% of its outstanding shares. It has $41.3 billion remaining under its existing program.
- Alphabet spent $14.5 billion on buybacks in the first quarter of 2023 (ended March 31), equivalent to about 1.1% of its outstanding shares. The company also authorized a brand-new program worth $70 billion.
Buybacks alone aren't a reason for investors to rush into a particular stock, but they are an added bonus. Famed investor Warren Buffett is a big fan of them; his Berkshire Hathaway investment company holds nearly 50 stocks and financial securities worth $333 billion, yet just one stock -- Apple -- makes up a whopping 47.5% of the entire portfolio.
Buybacks are one of his favorite reasons to own Apple. In Berkshire's 2020 shareholder letter, Buffett commented that despite selling $11 billion worth of Apple stock that year, the firm's stake in the company had grown to 5.4% over time -- higher than it was (5.2%) when it originally accumulated the position from 2016 to 2018.
How? Because every time Apple repurchases its stock, the remaining investors are left with a larger share of a shrinking pie (the pie being the number of shares in circulation).
Here's why you should buy Apple, Microsoft, Meta, and Alphabet
Apple is the world's largest company today, with a value of $2.7 trillion. It has a strong product portfolio featuring the iPhone, iPad, AirPods wireless headphones, and the Mac line of computers and notebooks. But its services segment, which earns subscription-based revenue from platforms like Apple Music and Apple News, continues to be its main growth driver. When the broader economy bounces back from this difficult period, its hardware sales should find renewed strength.
Microsoft, Meta, and Alphabet are also rapidly progressing in a brand-new area: artificial intelligence (AI).
Microsoft has invested in ChatGPT creator OpenAI this year and is integrating the chatbot into its product portfolio. It now powers Microsoft's Bing search engine, which could revolutionize how consumers access information on the internet. And customers of Microsoft's Azure cloud services platform can access the latest GPT-4 large language model, meaning the company could soon be a primary distributor of the most advanced AI tools to millions of businesses worldwide.
Alphabet is building its own large language models for its Google search engine to fend off the growing threat from Microsoft Bing. Additionally, it's delivering proprietary AI solutions to its customers via the cloud.
Finally, Meta is rapidly developing AI algorithms to more accurately feed content to users on its Instagram and Facebook social media platforms. Thanks to those efforts, the company saw a 24% year-over-year increase in the time users spent on Instagram in Q1 and much higher monetization efficiency.
Overall, buybacks are just one reason to own a stake in these four companies -- and investors should certainly consider doing so.
