Buybacks Boost Silicon Valley

Buybacks Boost Silicon Valley

Summary:2016 dividend and buyback expenditure is expected to grow faster than “growth” related expenditures.Icahn: Be aware of the current “earnings mirage”.Public firms are focusing more on executing more conservative cash strategies—a pro and a con for equity investors.The Bay Area knows its way around an expansion cycle. Few have experienced equity volatility like Silicon Valley, for both public and private entities. Low interest rates and a general appetite for risk has seemingly pushed tech multiples to the moon, but this underlying trend has bolstered The Valley more than many give it credit.Corporate America has been pushing cash back to shareholders for some time now. The trend has been to increase dividend yields and engineer higher earnings per share with buybacks. While many companies have been doing this since their inception, a number of firms have just jumped on this trend. Boards attract investors with these measures, which is especially important in a near zero interest rate environment with seemingly slow economic growth.Executing a shareholder friendly policy of returning a material amount of earnings back to owners can be good for the short term, but this policy might not be best in the long run.Innovation is the trade off here.Goldman expects “growth” related spending—which includes capex, mergers, acquisitions, and research and development expenses—to grow 3% this year. On the other end of the risk spectrum, buybacks and dividends are expected to grow 7% vs. 2015 levels. This underscores the thesis that the majority of U.S. public firms are focusing more on executing more conservative cash strategies vs. growing their businesses…with the marginal dollar going back to shareholders.In a recent note,...