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Microsoft's $40 billion buyback would be biggest of last decade

Satya Nadella, CEO of Microsoft
Justin Solomon | CNBC
Satya Nadella, CEO of Microsoft

A few companies like Microsoft are continuing to buy back billions in their own stock, but last quarter saw a significant decline in the number of companies making such large repurchases.

The number of S&P 500 companies with buybacks over $1 billion dropped to a 3-year low in the second quarter of 2016, according to data released by FactSet this week. Overall, fewer companies were opting to buy back any stock at all, marking the lowest participation rate since the end of 2010.

Microsoft announced Wednesday that it was authorizing up to $40 billion in buybacks. (The software company did not reveal a timeframe for the buybacks and told CNBC it has "nothing further to share" on timing.)

In the last quarter, we've seen other big spenders including Apple ($10.9 billion) and GE ($7.6 billion). Those two companies are also leading the market for most stock repurchased in the last 12 months.

In the last decade, companies have spent large sums on stock buybacks, which are often used to boost the price of the remaining shares and to prop up per-share earnings.

Despite the decline in buybacks last quarter, S&P 500 companies are still using an extremely large amount of their income to buy back their own shares. They spent nearly 72 percent of net income over the last 12 months on buybacks — up about 17 percent from a year ago.

With debt high and earnings expected to fall, buybacks will likely be even less affordable in coming quarters, especially if the U.S. Federal Reserve decides to raise interest rates.

Put Microsoft's $40 billion purchase in context: If the company does buy that full amount, and it doesn't reissue any of those shares, then that $40 billion alone would be bigger than most S&P 500 companies have done in total over the last 10 years.

Only 14 companies in the S&P 500 have spent at least $40 billion in net stock buybacks over the past decade. The leaders include ExxonMobil ($189 billion), Apple ($111 billion), IBM ($109 billion), Microsoft ($101 billion), Walmart ($66 billion), Pfizer ($60 billion), Procter and Gamble ($48 billion), Home Depot ($47 billion), and HP ($47 billion).

There is some evidence that buybacks may not help support a company's share price over the long term. FactSet's data showed that companies with repurchase programs have underperformed the S&P 500 in the past year by more than 5 percentage points.

The Fed decided to leave rates unchanged in its September meeting on Wednesday, but if credit tightens, more companies may find that burning cash or taking out debt for buybacks simply aren't worth the cost.