Lombard Odier: Ageing tech kings’ ‘fake’ buybacks suck wealth from investors

Many old guard technology companies’ buybacks are “fake” and channelling money to employees at the expense of shareholders, Lombard Odier Funds Technology co-manager Bolko Hohaus says.

Hohaus says mega-cap technology names with slowing growth issue increasing amounts of share options to remain as attractive to employees as exciting startups.

“This has financial implications if the shares created by those options are then being bought back,” he says.

In the year to June’s end, Microsoft bought back $6.7bn (£4bn) – 2 per cent of its market cap – while the its share count fell by just 1 per cent.

“That means 1 per cent of the company or $3.2bn was given to employees, equal – if the same amount had been paid out in salaries – to 10 per cent of Microsoft’s operating expenses,” Hohaus says.

Of the $29.3bn spent on share buybacks over the past five years, $18.8bn has served only to soak up the dilution of share options, he adds.

“Microsoft is by no means the only example of this.”

Over the past five years Intel has reduced its share count by 9.1 per cent by buying back $24.2bn of shares. However, $13.4bn was needed to offset the dilution of option grants. 

Qualcomm has purchased $5.8bn of its own stock in the past five years, but due to issuing share options its share count has risen by 4.6 per cent.

“As newcomers take marketshare in the sector someone has to lose and these are often the megacap technology companies,” he explains.

“These mega caps with big brand names typically earned their glory in the past.”

Hohaus is happy with Apple’s buybacks, however. 

Apple’s gargantuan share buy-backs of the past year have been touted as the most profitable ever, and other technology giants have been buying back huge amounts of stock as well.

Data compiled by Bloomberg and Standard & Poor’s shows the iPhone manufacturer’s share price soared by a quarter after buying back $18bn  (£10.7bn) of stock between January and March.

It leapt from $76.70 at March 31 to $100.50 on 20 August. 

An earlier round of buy-backs by last year when Apple snapped up $16bn of stock led to a 32 per cent re-rating, according to the market data companies. 

The two four-month returns combine to make the company’s buy-back regime the most profitable on record since 1998.

The other tech giants should be allocating cash to acquisitions, research and development or simply boosting dividends, Hohaus argues.

“Companies who waste their cashflow on these fake buybacks could instead be giving shareholders better returns.

“There is one message investors should give such companies: Stop handing out stock options if you are not an early-stage, hyper-growth company. There is no reason why a tech business should be different from an industrial company of the same size.”

Hohaus’s $406.4m Sicav has a 5.1 per cent position in Apple, according to FE Analytics, the second-highest conviction stock under Google. However, it is considerably underweight compared to the MSCI World Information Technology index, of which Apple constitutes 14.3 per cent.

It is also considerably underweight Microsoft IBM and Intel, the second, third and fourth-largest constituents, respectively, of the benchmark. None is in the fund’s top 10 holdings.

The fund is third quartile over the three years to 18 August and fourth quartile over the past year.