The following commentary was originally sent to Growth Seeker subscribers on Feb. 11, 2016, at 11:57 a.m. ET.
Last night, in an 8-K filing with the SEC, Amazon (AMZN) announced some changes to its board of directors, but what really has chins wagging is the news that the board has authorized an upsizing of the company's share repurchase program to $5 billion from the prior $2 billion plan announced in 2010.
At the current AMZN share prices, full completion of the program would equate to around 10 million shares or roughly 2% of Amazon's outstanding shares. Given the company's balance sheet and cash flow, we have little funding concerns for the new program, even as Amazon continues to invest for future growth for its online businesses (expanding Prime and its geographic footprint) and Amazon Web Services.
We view Amazon's upsizing of this program as a move by the board to help reassure investors by putting their money where their mouth is, so to speak, following the 30% slide in AMZN shares over the last several weeks. We'd also note that, as with other companies, as Amazon gobbles up shares, it also helps its year-over-year comparisons -- simple sandbox math shows how EPS rises when shares outstanding shrink, even if net income remains constant. The bottom line is this is a nice-to-have for Amazon, and the stock market will embrace the news warmly.
Stepping back for a wider view, Amazon is just the latest company to upsize, if not super-size, its share buyback activity. Other companies -- including but certainly not limited to, Cisco Systems (CSCO), Boeing (BA), B/E Aerospace (BEAV) and Akami Technologies (AKAM) -- have all announced similar initiatives, which is not surprising to us given the tone of the stock market, and they continue the rampant buyback activity we've seen over the last two years. According to data from FactSet, over the 12-month period ending last September, $566.1 billion was spent on share repurchases, nearly 65% of net income. Digging into the data, there is even more reason for some eyebrow raising -- in the trailing 12 months ending in the third quarter of 2015, 130 companies had a buyback to net income ratio that exceeded 100%! (Amazon and B/E Aerospace are part of TheStreet's Growth Seeker portfolio.)
Peering into the data, we find more than a handful of examples where companies reported favorable EPS comparisons year over year despite a year-over-year drop in net income. While we have always looked beyond EPS comparisons and used more valuation metrics than P/E ratios, we find the need to do so is even greater now given the near-pervasive influence of buyback programs on reported EPS.
Conspiracy theorists out there may be muttering something about helping management teams hit designated EPS growth targets that are part of their compensation plans, but our concern is the huge bite these programs are taking out of the business' resources for growth medium to longer term. That's the dark side of buybacks, when companies sacrifice the medium- to longer-term health of the business for a quick fix to a perhaps violent market that is coming under pressure.
Given our growth bent, we continue to favor companies that are looking to capitalize on their tailwinds and are investing for future growth rather than companies that are using financial engineering to put lipstick on the pig that is their reported earnings.
