The AI Buyback Wave: Rule Breaker Signal or Noise?

On Wednesday, SK Hynix (SKHY -0.49%) said it would buy back about $22 billion of its stock this year in addition to a program it announced in August. The memory chipmaker’s shares had fallen about 24% in the month before it reported a sixth straight quarter of record sales and profits.

It’s the latest in a run of AI chipmakers putting serious money behind their own shares, and two of the biggest are Team Rule Breakers recommendations.

• In late September, Nvidia (NVDA -0.62%) announced a new $150 billion buyback, what’s been reported as the largest increase to a repurchase authorization on record, bringing its total to $235 billion.
• Earlier this month, Micron Technology (MU -3.58%) disclosed in its annual filing that its board had authorized up to $35.16 billion in repurchases, the biggest ceiling in its history.

Both moves came with the shares off their highs: Micron fell about 14% in the month through late October, and Nvidia has traded sideways for six months.

Some coverage framed the buybacks as a vote of confidence from management. That reading could be right, but it’s worth checking before you lean on it.

The fourth of the six Rule Breakers Traits is: Good Management and Smart Backing.

The trait asks whether the people running and backing a business deserve your trust. How a company spends its cash is one of the more concrete ways to judge that.

Why a Buyback Can Be a Signal

Management sees the business from the inside, including order trends and margins that outside investors glimpse only once a quarter. When a board commits billions to buying back its own stock, it’s typically signaling a belief that the shares are worth more than the market is paying. The people making that call are likely to be judged on it.

A buyback this large can also hint at the strength of the balance sheet. Funding one while still investing heavily in growth generally requires a business to generate enormous cash, at least when it’s paid for without borrowing.

What to Check Before You Trust a Repurchase

An authorization sets a ceiling on what management may buy. In most cases, it doesn’t commit the company to buying anything, so the headline figure tells you less than the purchases that follow.

If a company mostly buys back stock to offset shares it hands employees as pay, the share count may hardly budge, leaving the owners’ slice of the business roughly where it was.

Micron, for its part, is expected to begin buying after Dec. 9, when restrictions tied to its CHIPS Act funding lift. Memory chips are also a cyclical business. Cash piles tend to be biggest near the top of a cycle, which is often when shares cost the most.

Reading the Signal on Two Rule Breakers

Team Rule Breakers recommended Nvidia in Stock Advisor in January 2017 at a split-adjusted $2.56. It’s up about 85-fold since, and the team recommended it again this year in another Motley Fool service. Micron joined the team’s real-money Data Center Superstars portfolio in January, and the team added more in April. That position is up about 155%.

Neither company was chosen for its stock buyback. The buybacks are just one more piece of evidence about the people running the businesses. To treat the repurchases as a signal, you’d have to believe management will follow through with actual purchases and that the cash comes from businesses that are still growing. Upcoming quarterly reports should help bolster beliefs with numbers in the share count and the cash flow statement.

Source: www.fool.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.