A strong economy and tailwinds from tax reform have caused cash to swell on corporate balance sheets -- and that's led to increasingly larger share buybacks. In the third quarter of 2018, S&P 500 companies bought back a record $204 billion of their stock, up 58% year over year, according to S&P Dow Jones Indices.
As a result, share repurchases by companies in the S&P 500 totaled $583.4 billion in the first nine months of 2018, putting buyback activity easily on track to eclipse the full-year record -- $589.1 billion spent on buybacks in 2007.
The 20 companies that bought back the most shares last quarter accounted for 54.3% of all S&P 500 buybacks, the highest since 59.8% in the first quarter of 2010. However, share repurchases were greatest for these three companies, all in the information technology sector:
1. Qualcomm -- $21.2 billion
After spending $1.1 billion from March through June, Qualcomm spent a staggering $21.2 billion on share repurchases between June and September. That's the third-highest quarterly spending on buybacks in S&P 500 history, and it brings Qualcomm's total buybacks to $44.2 billion over the past five years.
The chipmaker's buyback wasn't a surprise. Qualcomm announced a $30 billion repurchase plan earlier in the year, following the scuttling of its $44 billion acquisition of NXP Semiconductors by regulators. And in September, it said it spent $16 billion buying back shares from investment banks, including Bank of America and Citibank.
The chipmaker's sales were $5.8 billion in its fiscal Q4 ending Sept. 30, and it came into the current quarter with $8.9 billion remaining on its buyback authorization and $12.1 billion in cash. Since the company generates over $1.2 billion in adjusted net income per quarter, it has plenty of cash to support future buybacks, but I wouldn't expect its next authorization to be as big as this one was. Not including this fiscal year, it spent an average of $3.76 billion on repurchases per year since 2010.
The one wild card to watch, though, is Qualcomm's ongoing suit against Apple, claiming Apple owes royalties on sales of devices using its intellectual property. Depending on how this suit pans out, it could impact Qualcomm's future buyback activity.
2. Apple -- $19.4 billion
Apple repurchased $21.9 billion in stock from March through June, and it followed that up by buying $19.4 billion additional shares from June through September
It was the fifth-most ever spent by an S&P 500 company in a single quarter, and Apple now has the distinction of being responsible for seven of the eight biggest quarterly buybacks in S&P 500 history. Over the past five years, Apple has spent $224.2 billion on buybacks, including $75.2 billion in the 12 months ending September 2018.
Significant sales growth for its consumer electronics devices and high-margin services, including the App Store and iTunes, has financed all those repurchases. In its fiscal fourth quarter ending September, Apple reported that sales grew 20% year over year to $62.9 billion, including a record $10 billion in services sales.
In the 12 months ending September, sales totaled a staggering $265.6 billion, and Apple's healthy margins (gross margin was 38.3% last quarter) allowed it to deliver $59.5 billion in net income over the period. Apple is guiding for sales of at least $89 billion during the current quarter (fiscal Q1 2019), which includes the holiday shopping season, so it should have plenty of financial flexibility to continue returning money to investors in the coming year.
In May, Apple announced a $100 billion buyback program, and it entered its current fiscal first quarter with $123 billion in cash, net of debt. Since Apple's shares have recently fallen over worry that iPhone demand was slipping, it wouldn't be surprising if the company ends up buying a lot of shares this quarter, too.
3. Oracle -- $10.3 billion
Oracle spent $10.3 billion on repurchases from June through September, up from $5 billion from March through June, and $800 million in the third quarter of calendar 2017. As of September 2018, the software giant had bought back $51.5 billion worth of its shares in the past five years, and $77 billion worth of shares in the past 10.
Like Qualcomm and Apple, Oracle is a technology heavyweight with a deeply entrenched client base and truckloads of cash flow. Its sales were $9.6 billion in its fiscal second quarter ending Nov. 30, and over the past 12 months, it produced a whopping $13.8 billion in free cash flow that it's putting to work via repurchases.
During its earnings conference call on Dec. 17, management said it has bought back 602 million shares over the past 12 months, reducing shares outstanding by more than 12%. Its lower share count is one reason why Oracle's non-GAAP (generally accepted accounting principles) earnings per share are growing much faster than sales. Last quarter, revenue was unchanged from the prior year, but EPS increased 16%.
Oracle is guiding for "record strong EPS and free cash flow growth during the second half of this fiscal year," so I suspect it will use any weakness in its shares as an opportunity to buy more of them.
A good argument can be made that the hundreds of billions being spent by big companies on buybacks would be better spent on investments that can drive future growth. However, finding investments that can boost earnings at large companies as easily as share repurchases isn't a simple task -- so Qualcomm, Apple, and Oracle are likely to continue buying back shares as long as cash flow allows.
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Todd Campbell owns shares of Apple. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Oracle and Qualcomm and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short December 2018 $52 calls on Oracle, and long January 2020 $30 calls on Oracle. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.