Inflation Could Be Prompting Companies To Add Or Increase Stock Buyback Programs

Key Takeaways:

• The Consumer Price Index (CPI) Shows Inflation Fell from October to November
• Oracle
  
  ORCL
  and Broadcom
  
  AVGO
  Announce Earnings and Stock Buyback Programs
• Stock Buyback Programs Could Be a Hedge for Inflation

Before the market open, the Bureau of Labor Statistics released the Consumer Price Index (CPI). The report showed that core inflation grew as expected at 0.5% month over month, which was actually lower than October. It also grew 4.9% year over year, which is a 40-year high. Equity index futures were rallying overnight and rallied even more after the CPI numbers. The Cboe Volatility Index (VIX) had pulled back near the 20 level in premarket trading and then broke even lower as equity futures rallied.

Despite the inflation rate being the highest in 40 years, many analysts expected it to be even higher than forecasted. So, hitting the projection is being seen by many investors as a potential top for higher inflation rates. The CPI news also gives the Fed more wiggle room in accelerating its tapering plans when it meets next week. The 10-year Treasury yield (TNX) momentarily fell below 1.5% on the news, but crude oil (/CL) is bouncing back in premarket trading after falling on Thursday, which will likely put upward pressure on interest rates.  

A couple of stragglers from earnings seasons reported after Thursday’s close. Oracle (ORCL), Broadcom (AVGO), and Costco (COST) all announced better-than-expected revenue and earnings. Oracle rallied more than 6.5% in after-hours trading on the additional news that the company plans to repurchase an additional $10 billion of its stock. Broadcom also rallied in after-hours trading, climbing more than 6% on the news that it plans to buy back $10 billion of its stock as well. On the other hand, Costco only rallied 1.75% in after-hours trading. The company did not announce a stock buyback program; instead, it reported lower-than-expected sales.

Chewy (CHWY) also announced, but it missed on earnings estimates despite meeting revenue estimates. The stock fell 7.6% in after-hours trading, which may add to its year-to-date decline of 37%. Lululemon (LULU) reported better-than-expected earnings and revenue but is trading about 1.5% lower in premarket trading. The company warned that inflation pressures and reduced its full-year revenue guidance.

Tesla

TSLA
(TSLA) is trading below the $1,000 per share on Friday morning. There are reports of an increasing number of insiders are selling shares of the company along with CEO Elon Musk. According to The Wall Street Journal, 48 top executives at Tesla have sold more than $200 million each from stock sales, which is about four times the average between 2016 through 2020.

In addition to executives, other notable investors have sold shares including cosmetics billionaire Ronald Lauder, Google

GOOG
co-founders Larry Page and Sergey Brin, some of the Walton family heirs or Walmart

WMT
, and Mark Zuckerberg of Facebook have all taken profits by selling shares. Insiders have sold $63.5 billion shares in 2021 through November.  

Spoiler Alert

In the latest episode of the popular HBO series Sex in the City, a popular character known as Mr. Big died while exercising on his Peloton bicycle. Oddly, Peloton (PTON) felt the need to respond to the death of the fictional character, pointing out that Mr. Big lived an “extravagant lifestyle” of drinking, smoking cigars, and eating unhealthy foods. Perhaps even odder still, Peloton was trading 3.49% lower in premarket trading.

Quick educational moment: Premarket trading often has fewer participants because many investors don’t trade stocks outside of normal market hours. So, a premarket move like Peloton should be taken with a grain of salt until more investors have a chance to respond to the news. The market is an important discounting mechanism that often reflects the collective wisdom of its participants.  

Buybacks Dethrone the King

The term “cash is king” has a different meaning, depending on the context. In the investment world, it often refers to companies that are able to generate a lot of cash. In down markets, investors often look for companies that have a lot of cash on hand because high liquidity helps a company survive the lows. However, many companies appear be trading in their cash for their own shares.

Slicing an Apple

AAPL
: In recent weeks when the S&P 500 had pulled back, Apple (AAPL) continued to climb, which prompted many investors to joke that instead of a “flight to quality” it’s a “flight to Apple”. The rally now has Apple closing in on a $3 trillion market cap. One reason investors may have moved into Apple is because of its cash position. The company generates about $100 billion annually, and as of September 2021, it had more than $20 billion in cash and cash equivalents on its balance sheet.

However, over the last five years, Apple’s balance sheet has seen its cash position shrink each year. According to MarketWatch, Apple spent nearly $20 billion in its fiscal fourth quarter on stock buybacks, and as of October, it had spent a total of $85.5 billion in 2021. On problem with this is that the shrinking cash position could come back to haunt Apple if the economy was to turn down. The same could be true for many other companies choosing to buy back shares.   

Everybody’s Doing It: Not counting Oracle and Broadcom, in December, six companies have announced stock buyback programs or plans to continue their programs including Dollar General (DG

DG
), Nuco

NUE
r (NUE), Chesapeake Energy

CHK
(CHK), Big Lots

BIG
(BIG), ReneSola (SOL), and NRG

NRG
Energy (NRG).

Alternatives: There are many reasons why companies choose to start buyback programs, and I won’t hit them all. Feel free to watch our video on stock buybacks. But one development that could be pushing the trend is inflation. Inflation eats away at the purchasing power of cash. This means investing in cash is a losing position. While every company and person needs cash available for daily functions, leaving too much money in cash can be very costly. So, these companies could be choosing to bet on themselves and their ability to grow their business instead of allowing inflation to eat away at their cash reserves.  

TD Ameritrade® commentary for educational purposes only. Member SIPC.