Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Nvidia’s Share Buybacks: Optimism or Warning?
Charu Chanana
Chief Investment Strategist
Summary: Nvidia’s $25 billion share buyback announcement has been puzzling investors on whether it indicates optimism around the company’s future stock price or whether it is a warning that the company is running out of suitable investment options. Another aspect to consider is the buyback yield, which for Nvidia still pales in comparison to its peers due to the recent run higher in its stock price.
Nvidia announced a $25 billion worth of buyback of its shares in its Q2 earnings, along with a stellar set of numbers and a robust outlook. This comes after its stock has more than tripled this year, and is close to a fresh all-time high. The buyback announcement caught markets off-guard as investors assessed the motive behind the move.
Companies commonly repurchase their stock as a way to return capital to shareholders, or when they think that the stock is cheap and company is undervalued. Such buybacks can benefit a stock's price by reducing the supply of shares. But given that Nvidia’s share price has had a great run this year and valuations are sky-high, many investors have been wondering if boosting the stock price was really one of the objectives for Nvidia to announce a share buyback.
Another reason for curiosity has been around the potentially massive investment capital needs for Nvidia, given the company is at the centre of AI research and development. That should have meant that Nvidia would have enough avenues to plough back its cash into rather than returning it to shareholders. Take for example the energy companies, that have returned massive amounts of capital to shareholders over the last few years, as they generated abundant profits due to high oil prices but their capital expenditure needs have been dwindling with the move towards ESG and non-fossil fuel based energy supplies. That puts Nvidia’s move in question, sending a warning signal about the AI potential from here. A case could be made given that Nvidia is generating tremendous amounts of cash, more than what they need for their current investment strategy, so they will continue to look for M&A opportunities (which may have some regulatory restrictions) or announce buybacks to use up excess cash.
While Nvidia’s $25 billion share repurchase plan is significant, roughly the same as its expected net income for FY 2024 (year ending January 2024), the amount is smaller than the buybacks announced by some of the other Big Tech and large growth companies. Apple, Chevron, Alphabet, Meta and Wells Fargo have announced buybacks of $90 billion, $75 billion, $70 billion, $40 billion and $30 billion, respectively this year. Looking at shareholder yield, or the ratio of total dividends paid out and net reduction in share capital over the past 12 months relative to the current price, Nvidia’s $25 billion repurchase translates to just over 2% from an average yield of under 1% over the long-term. Nvidia’s shareholder yield pales in comparison to that of S&P 500 at 2.58% and more so in comparison to that of Big Tech, with Apple’s at 3.2% and Alphabet’s at 4% currently.
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