When Stock Buybacks Don’t Help: MSFT vs. AAPL’s Repurchases

Rudy Martin

Stock investors can make money many different ways. Of course, we all want our shares to gain value. We like dividends, too. Cash in your pocket is always nice.

Share buybacks can be reason to celebrate, too — but not always. Today I’ll tell you why repurchase programs don’t always work as planned.

When I wrote about share buybacks a few months ago, Apple (AAPL) had just announced a $60 billion repurchase program. Investors were electrified and promptly drove AAPL shares higher.

The company had some volatility since then, but is still way ahead of the pre-buyback level. The successful launch of new iPhones is another good sign for Apple investors.

Now another tech giant is doing the same thing. Last week Microsoft (MSFT) made the news with a $40 billion share repurchase plan … yet, unlike AAPL, the stock barely budged. Why?

It’s always hard to pin a stock’s performance on any single factor. Investors buy and sell large-cap giants like Microsoft for many different reasons. Every buyer has different expectations.

Just look at some recent key events for Microsoft …

  • The quintessential software company expanded into the hardware business. Buying Finland-based mobile phone manufacturer Nokia may be a good move for MSFT — but it is definitely a major change.
  • Longtime CEO Steve Ballmer — a lightning rod for Microsoft critics in recent years — announced plans to retire from the company soon. Who will take his place? We don’t know yet.
  • This week Microsoft launched an updated Surface tablet device. The original version didn’t sell very well. We’ll have to wait and see how Surface 2 performs.

These developments — and many smaller ones — will have an impact on Microsoft shares going forward.

On the other hand, none of the three major changes surprised Wall Street. The Nokia acquisition and Ballmer retirement were already old news when the MSFT buyback plan hit the wires.

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The Surface 2 was already in the pipeline, too. No one expected Microsoft to surrender its foothold in mobile devices and software. Yes, they’re fighting for third place, well behind Apple and the Android platform from Google (GOOG).

Microsoft is way behind — but trying hard to catch up. But I wouldn’t write its obituary yet.

Why did the buyback not make more waves? No matter how you spend it, $40 billion is big money.

Again, there are probably many different factors at work — but I can point to one big one …

Microsoft was already buying its own shares. The new program does nothing more than replace an earlier one that expires this month.

A cash-rich company like Microsoft has to deliver something to shareholders. Excess cash is a bad sign. It de-leverages the balance sheet and signals management is out of ideas.

Companies in this situation must either distribute the cash via buybacks and dividends, or put it to work with business expansion or acquisitions.

Apple can hold a huge cash hoard because the company is still growing and innovating. Investors aren’t so sure about Microsoft.

Share buybacks can be a vicious circle for management. Once you start one, investors come to expect it.

On balance, share buybacks are still bullish in most cases — but you have to look at the whole picture, not just one corner. This is what I do in Global Trend Trader. We’ve been in and out of tech stocks like AAPL, MSFT and others many times.

Earlier this week I recommended my subscribers take profits on three well-known tech stocks. I also told them about another domestic sector that is building momentum. We’ll probably jump aboard soon.

The next time one of your stocks announces a buyback — take a "step-back" and look at the news in context. You don’t want to ride the wrong trend.

Good luck and happy trading!

Rudy Martin