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Got growth? Investors shun titans of buybacks

The titans of tech buybacks have not been cutting it this earnings season. Apple and Microsoft fell on their earnings reports, while more growth-oriented tech companies that don't lean on share repurchases, like Google and Netflix, have surged.

To some, that divergence serves as yet another sign that investor predilections are changing.

"I think growth has been more in favor this year," said Oppenheimer portfolio strategist Andrew Burkly. "As we've gotten later in the cycle, I think investors are not as enamored with buybacks anymore—they want to see underlying growth. And we have seen growth companies do a little bit better this year based on that. So you may be at the point where buybacks are supporting EPS [earnings per share], but the stocks aren't really being rewarded for that."

According to RBC, Apple's EPS growth has outpaced its earnings growth by 6.7 percent, which implies that the net effect of share repurchases has been to increase earnings per share by 6.7 percent. Similarly, Microsoft's buyback program has increased EPS growth by 3.7 percent compared with earnings. Apple and Microsoft shares fell 4.5 percent and 2.3 percent, respectively, in the two days surrounding earnings, compared with the S&P 500 as a whole. And since reporting earnings, Apple shares are down by more than 10 percent.

Similarly, slow-grower and serial share repurchaser IBM fell sharply after its report.

The story is very different for Google, which actually saw EPS growth that was slightly smaller than its earnings growth, meaning shareholders actually suffered dilution rather than reaping the benefits of buybacks. That stock surged 19 percent in the two days surrounding earnings (again, this is a relative performance measure) making it the best-performing S&P 500 information technology company off of this quarter's earnings.

On the even more speculative side of things, growth-oriented Internet companies Netflix and Amazon rallied on their results.

That said, when one zooms out to look at the overall tech sector, the picture changes a bit. According to an RBC analysis, there is actually a weak (that is, not statistically significant) positive relationship between contributions from buybacks and relative performance off of earnings. And the tech sector company with the biggest EPS growth contribution from buybacks, Juniper Networks, enjoyed a relative 6.8 percent rise off of earnings.


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