VerityData Director of Research Ben Silverman was on SiriusXM Radio’s The Business Briefing to discuss buybacks in the tech sector, generative AI, and insider trading activity.
Ben. First, can you tell us a little bit about VerityData and your role there?
VerityData provides investment and research tools for institutional investors. We have a platform that provides insider trading data, buyback data, management change data. We also provide unique views of SEC filings, providing redlining and other capabilities. And then we have an RMS, a research management system, which is software that institutional investors use to manage their internal research flow. And in my role, I’ve been here actually for, just celebrated my 20th year at the company, and I run a research team where we look at the insider trading and buyback and other data, and we do a lot of data and analytics and provide some qualitative research views as well.
We’re having a big tech sector earnings week and buybacks, company buybacks. Your big subject of conversation, talk to us about why you think investors should be keeping an eye on company buybacks. Especially right now.
When we think about big tech and we think about buybacks, the way to think about it is that there’s really not a lot of M&A possibility for these larger companies — Apple, Alphabet, Meta — companies like that. Now, we just saw Microsoft complete its acquisition of Activision Blizzard, just sort of anomalous in that space and for companies that size. So, with not a lot of M&A opportunity there, big tech companies use buybacks as a variable dividend essentially. And so what we’re always looking for is to see, obviously the changes in the execution of the buybacks. A lot of investors tend to focus on the buyback announcements. A company alongside earnings will say, our board has authorized a $15 billion plan for ourselves and our clients. We’re more interested in the actual execution: are companies being opportunistic? When we look at big tech and just a lot of tech companies in general, what we find is buybacks are just part of their capital allocation scheme.
They’re not really being opportunistic with them. And so, what really matters for investors is to track these buybacks and to really understand, again, are companies’ management teams getting more aggressive when the stock comes in? Are they lightening up on the buyback execution when the stock rises or are they price agnostic and just using it to return cash to shareholders? And one thing to think about with buybacks versus dividends is when a company reduces its dividend, it’s big news and it’s going to hit the stock hard, and it’s something that no management team wants to do. When a company reduces its buyback spend on a quarterly basis, that’s less steam. And so it’s an easier way to reign in the cash that they’re paying out the shareholders.
Ben, let’s talk about some major tech company buybacks that have occurred in the recent past and how they’ve impacted investor sentiment. I guess want to start with might be Alphabet.
Yeah, Alphabet. When we look at Alphabet, the buybacks are pretty much part of the company’s DNA at this point. If we look at the just-completed quarter for Q3, they bought back $15.8 billion in shares. Now that’s a record for them, but if we look back at the trailing size quarters, their average was $15.2 billion each quarter. So not what we would call a dramatic acceleration. Another thing to think about is management didn’t even address buybacks in their earnings announcement or on their earnings call. So I think Alphabet is looking at buybacks as again, just part of a capital allocation scheme. They’re not what we would call opportunistic. They’re not accelerating when the stock comes in or trying to be aggressive in any way.
Microsoft is another company, their buyback volume was down over the past year. Talk to us about their buyback strategy and its implications.
Yeah, so Microsoft actually, it’s interesting because their buyback in Q3 was their smallest in four years. Now that’s probably a symptom of the Activision Blizzard deal. That was a $62 billion cash acquisition. So leading up to that deal close, which was about two weeks ago, we think that Microsoft’s deceleration and buybacks was a result of just conserving some cash to use for that deal. But the company, the stock had hit a multi-year high during the quarter, and this was the highest price that they’d bought back at in a couple of years. So again, they’re looking at buybacks. They’re repatriating about, on average, about 1% of shares outstanding per quarter. You combine that with the stock stock-based compensation dilution, you cut that rate to what we call an effective ratio to about 50%. So about 50% of the shares they buy back are actually being retired. So they’re modestly reducing outstanding share count on a quarterly basis, and that seems to be their goal.
The next big name: Meta. You say they were fairly aggressive from Q3 ‘22 to Q1 ‘23, but have since reduced their pace. Talk to us about what’s been going on with Meta.
Yeah, so Meta is interesting. The company really reigned in buybacks in Q2 of this year, but they just came out with earnings, I believe yesterday, always hard to keep up, and they were showing signs of increaasing that. So, they bought back $3.7 billion in Q3. That compares to just $811 million in Q2. But if we go back to Q one, they bought back over $9 billion in shares. So, they’ve definitely reigned in that pace. They’ve got a lot of investments in AI among other things. And that’s when companies in this group are reigning in this buyback spend. They’re usually using it internally. Microsoft is anomalous there and having done the large acquisition, but otherwise, what they’re doing is they’re trying to deploy that money either for r and d or in a lot of cases to retain talent. But so management didn’t talk about their buyback strategy on their call, so it’s a little fuzzy here why they reduced the buyback spend in Q2, and why they started to return in Q3.
So, what we’re going to be looking for in the future quarters is, are they going to ramp back up to the levels that we had seen in previous years? I mean, if we look to the back half of 2021, the company deployed over $33 billion. Now, that wasn’t done at a good price. Stocks that are around $300 right now, all those buybacks occurred at over $330. So again, it matters when these companies deploy this capital and at what price, and this is a really good example, Meta, of a company that has not done a good job of deploying a buyback.
Ben, in very general terms, what are you seeing developing for the next coming couple of quarters in regard to buybacks? What major trends are you seeing?
Overall? We are seeing buybacks lightening up a bit. So, we saw a fairly substantial sequential and year-over-year decline in Q2. It’s Q3 earning season now, so we’re just starting to get in the Q3 execution data and based on where we would normally be at in the quarter, it’s trending light again. So it’s a little hard to predict with just the small amount of data in, but potentially looking at another 5% decline. And I think this speaks to multiple things. I think in Q3, we had some high stock valuations for the first part of the quarter, tightening credit conditions, increased the cost of capital, obviously inflation, there’s a lot of geopolitical things going on that will cause companies to start to conserve cash. So, we do feel that we’re going to see buybacks this year continue to decline both as the Q3 data comes in and as well as in Q4. It’s possible we start to get a bit of a rebound next year. But one of the interesting things is we’ve looked at this data for 20 years is that as a whole, companies deploy more cash for buybacks because they’re generating more cash when stock prices are good. So it’s a little counterintuitive and that when stock prices start to come in, buybacks actually start to drop. But that’s what for the back half of the year, definitely we feel like we’re going to see a little less buyback activity.
Related: Buyback Macro Trend Report
Talk to us a little bit about what else you’re doing at VerityData. Are you engaging in any other interesting research regarding the tech sector or the business community?
Yeah, so one of the main things we do is we analyze insider trading. Insider trading would be executives and directors of companies buying and selling their own stocks. So that’s one of our main focus points. And it being earning season, we’re starting to see insiders start to buy and sell stock in the wake of earnings. So, for example, we saw some good insider buying at Northern Trust and Sherwin Williams within the past couple of days. These are signals that insiders of the company believe the stock is undervalued. So that’s one of our focuses. And we also, we look at that in conjunction with buybacks because when you think about it, buyback is a management action. The board approves the allocation management, usually the CEO and the CFO and some other finance executives will determine the execution. So that’s a management action. They’re determining what to do with shareholder money. And then when we look at insider trading, that’s a management action as well. They’re determining what to do with their own money. So these are both actions versus words on a press release or on a conference call. And that’s the kind of things we like to focus on. What is management actually doing versus what they’re saying?
We’re working on that. And then one of the other things that we’re working on is generative AI. This has been in the news and now how can the investment community get value out of generative AI? And so one way is just through efficiency. So we recently launched a generative AI expert summary for conference call transcripts. So looking at again, what management says. This time we wanted to apply the power of generative AI to see if we could make it easier for investment professionals to understand what management’s saying on earnings calls and to do it very quickly. So we just launched that and we’re very excited about it, and we think that that type of use case is really one of the things that’s going to help propel generative AI in this space.
Generative AI, of course, an absolutely fascinating conversation in our last minute or so. I guess, are you seeing any data about the depth or degree of adoption? I know we talked a lot about the breadth of adoption, but the depth of adoption I think is the bigger question. How much is it actually being integrated into company actions?
I mean, certainly in our space, we’re starting to see it more and more, and we’re hearing from our clients that they’re deploying it internally. And then when we look out across just the sphere of public companies, it is a hot button topic, whether it is a manufacturing company, restaurant company, retail, whatever it may be. Certainly the tech companies are deploying it aggressively. We saw that with some of the Apple announcements within the past week. It’s a wonderful tool. I think there’s a lot of misunderstanding about what could be done with it at this moment, and certainly the cost involved with using it. One thing I can tell you is that from just spending the past several months really digging into it, what I see out in the marketplace in terms of proposition, not just in our sector, but just everywhere, there’s some smoke and mirrors out there, which is kind of interesting because there’s a lot of things that people are saying are being done with AI, but it’s probably just the small layer of AI on top of a lot of older technology. But it’s going to, as we’ve with Nvidia, we’re going to see a lot of spending in this space.
Ben, thank you so much for joining us today. Please remind us where we can follow you on social media.
The best place is Verityplatform.com, where we have our blog, our Differentiated podcast available on all major podcast platforms, and then on LinkedIn as well.