Technology companies are accelerating share repurchase activity in the face of economic uncertainty and record high share prices. This runs counter to our preference which is to invest for long-term growth.
Apple (AAPL) spent $72 billion on share repurchases in the fiscal year ended September 30th, up from $67 billion last year.
Our preference is for Technology companies to invest for growth during this period of economic uncertainty. Investments that would expand competitive moats, maximize customer satisfaction and increase customer value propositions are in shareholders’ best long-term interest. However, as the economy has slowly recovered many companies have reinstituted share repurchase programs and accelerated share repurchase activity at the expense of long-term growth initiatives. This is a function of: 1.) the capital markets’ short-term focus; 2.) zero interest rate policy and 3.) short-term greedy management teams.
Taking these three items in order:
- Capital markets’ short-term focus: Fewer and fewer market participants give a damn about the long-term. This can be traced to the rise of Quant funds since the early 2000’s and more recently to the rise of the retail investor and day traders. Each of these three cohorts is primarily concerned with short-term stock price movements and could not care less about long-term company strategy, execution and competitive positioning.
- Zero interest rate policy: We have had low interest rates since the 2008 financial crisis and near zero interest rates since April 2020. Low rates have created a corporate debt bubble and have inflated asset prices. Government stimulus has further inflated asset prices since April 2020. Thus, for the past dozen years management teams have used cheap debt to repurchase shares. Many management teams prefer to repurchase their own shares rather than pursue M&A transactions at inflated valuations.
- Short-term greedy Management teams: CEO compensation plans create a short-term incentive to repurchase stock, even at inflated prices. Repurchases boost the value of the equity component of CEO compensation and indirectly influences the amount of the cash component which is in part tied to recent share price performance. While share repurchases do support equity valuations they do nothing to further the value of a company’s product portfolio. Every dollar spent on a share repurchase program is a dollar not invested in growing the business. Thus, for many companies short-term financial machinations have taken priority over doing what is best for the business over the long-term.