As Nvidia splashes out, are stock buybacks worth it?: McGeever
By Jamie McGeever
ORLANDO, Florida (Reuters) — To buy back, or not to buy back.
The highest U.S. interest rates in over 20 years coupled with Wall Street's remarkable resilience has brought an old boardroom dilemma into sharp focus: are share buybacks worth it?
Artificial intelligence giant Nvidia (NASDAQ:NVDA) clearly thinks so, announcing on Aug. 23 that it will repurchase $25 billion of its shares. Ditto Apple (NASDAQ:AAPL), Chevron (NYSE:CVX), Alphabet (NASDAQ:GOOGL) and Wells Fargo, which this year have announced buybacks of $90 billion, $75 billion, $70 billion and $30 billion, respectively.
These are big numbers, but like everything else related to Wall Street, the underlying dynamics are distorted by Mega Tech: buybacks among S&P 500 companies this year will likely be lower than last year's record $952 billion, according to Refinitiv data, and as a share of the index's overall market cap have been falling since Q1 last year.
This metric as a share of market cap is known as the 'buyback yield'. The average of roughly 400 companies in the main index that have one is around 2.44% and the median is 1.73%, calculates Joe Kleven at YCharts.
For context, Nvidia's $25 billion repurchase represents just over 2% of its market cap, and the firm's longer-term average buyback yield is under 1%. Marathon Petroleum (NYSE:MPC), on the other hand, has a long-term buyback yield of around 20%.
«Buyback yields are quite low, because share prices and market caps are so high. Buybacks are not keeping pace with share value,» said Ali Ragih, senior research analyst at VerityData.
U.S. stocks are expensive. Relative to bonds, they are the most expensive in almost 20 years, as shown by the 'equity risk premium' that measures prospective
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