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Rising Interest Rates, Tax Benefits Have Tech Giants Shift Buyback Strategies


Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Trading Of US Linear TV Advertising Shifting To Programmatic Trading

Every Industry Is Now A Technology Industry

Online Video Bolstering Consumer Home Video Spend, Spearheaded By Subscription Streaming

Banking & Financial Services
Rising Interest Rates, Tax Benefits Have Tech Giants Shift Buyback Strategies


With interest rates rising and the impacts of federal tax reform taking effect, companies, especially tech giants, have drastically changed their capital allocation strategies

Jul. 13 2018 — After a record-breaking first quarter, stock repurchases in the S&P 500 are set to reach unprecedented heights in 2018. With interest rates rising and many companies flush with cash from tax reform, debt analysts expect to see companies continue to return massive amounts of capital to shareholders while also paying down debt.

According to an analysis of S&P Global Market Intelligence data, the first quarter of 2018 set a new record for quarterly share buybacks with $188.46 billion in common stock repurchases. The previous record for the index, which launched in March 1957, was set in the third quarter of 2007, when repurchases totaled about $172 billion, Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said in an interview. Leading the index in buybacks during the first three months of 2018 was the information technology sector, with common stock repurchases totaling $63.08 billion, more than twice the amount seen in the year-ago period.

In the past, a number of the heaviest repurchasers — including Apple Inc. and Microsoft Corp. — funded their buybacks not with cash, but rather with debt. This is because prior to tax reform, when interest rates remained low, it made financial sense for certain investment-grade issuers to take on debt domestically while keeping large piles of cash overseas as the interest rates on the debt were significantly lower than the tax rates the companies would have faced for repatriating their cash.

That strategy has now been turned completely on its head as companies simultaneously pay down debt and pay out for enlarged capital return programs, debt analysts said.

The spike in buybacks comes at the same time that the U.S. Federal Reserve is raising its benchmark interest rate. The Federal Open Market Committee recently set a target range for the federal funds rate of 1.75% to 2%, up 25 basis points from the previous level. Moreover, the central bank signaled it may take a faster path on rate hikes this year, with some Fed officials favoring increasing the rate four times in total this year.

"At the end of the day, companies are starting to balance the needs of the two constituents — both equity holders and debt holders. So there will be significant buybacks but for mega caps that had significant amounts of debt … they are also likely to unwind their debt position as well," Andrew Chang, director of S&P Global Ratings services, said in an interview.

In particular, he expects a "significant increase in share repurchases in calendar 2018 and even in 2019 mostly led by the bigger caps such as Apple, Oracle [Corp.] and Cisco [Systems Inc.] — the really large companies who have been parking their cash overseas in lieu of repatriation for many years." He noted that these repurchases will be funded with cash on hand.

"Now that tax reform has passed, companies don't see the need to borrow anymore and they are asking themselves, 'What should we do with all this excess cash?'" Chang said.

The tax overhaul adopted in 2017 not only slashed the corporate tax rate to 21% from 35%, but it also set a 15.5% repatriation rate for cash held overseas. These changes "set the framework for technology companies to support capital returns with internal resources as opposed to issuing incremental debt," Moody's said. While it expects increased capital return programs, including higher dividends and repurchase levels, it predicts "significantly lower debt issuance from large, cash-rich technology firms that had previously issued debt domestically in order to synthetically repatriate funds."

All in all, the firm expects "a general de-leveraging over the next several years" in tandem with elevated capital returns.

Apple is already practicing that strategy. Citing tax reform, the company in May said its board approved a new $100 billion share repurchase authorization as well as a 16% increase in its quarterly dividend. In the first three months of 2018, Apple was the largest repurchaser of stock in the S&P 500. The company said it spent $23.5 billion to repurchase shares of its common stock. An S&P Global Market Intelligence analysis of the company's consolidated cash flow statement puts the total at $22.76 billion. An Apple spokesman declined to comment on the two figures. As of March 31, the company held cash and cash equivalents of $45 billion, short-term investments of $43 billion, long-term investments of $179 billion, balanced against $122 billion of debt.

By comparison, the quarter's second largest repurchaser of stock in the S&P 500 was the biopharmaceutical giant Amgen Inc., which spent $10.70 billion on buybacks. The No. 3 spot went to the technology conglomerate Cisco, which spent $6.21 billion on repurchases.

In addition to buying shares, Cisco issued no debt during its most recently ended quarter and repaid nearly $3.65 billion in debt. Total debt declined $11.25 billion during the period.

Chang called the deleveraging occurring in the IT sector a "natural unwinding of the balance sheet."

Looking ahead, Chang said the elevated levels of repurchases seen in the first quarter will likely continue throughout 2018 and even into 2019 or 2020.

"I would say 2018 will not be the peak — it will be 2019 or even 2020," Chang said, noting the large cash balances tech companies are working through. Rather than a short-lived "big bang," Chang said higher repurchases and repayments will continue over the next couple of years "until that point where the companies have rightsized the balance sheet."

Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Steve Piper shares Power Forecast insights and a recap of recent events in the US power markets in Q4 of 2017. Watch our video for power generation trends and forecasts for utilities in 2018.

Technology, Media & Telecom
Trading Of US Linear TV Advertising Shifting To Programmatic Trading

Oct. 08 2018 — Both buyers and sellers of traditional linear TV advertising, not including connected TV or over-the-top video, are moving toward the adoption of programmatic trading. In 2017, Kagan estimates that $690 million or 0.9% of total linear TV spend was traded programmatically. Within the next five years, that figure is expected to climb to $9.76 billion or nearly 12% of total linear TV advertising revenue. MVPDs are forecast to trade the greatest percentage of their ad inventory programmatically in 2022 with 30% of ad revenue from programmatic trading.

Kagan defines programmatic trading as being automated and data-enhanced, not just one or the other. Trading may be through a private or open marketplace and does not have to be through an auction, which is more common in digital video advertising.

There are several issues holding participants back from programmatic trading. Unlike digital programmatic marketplaces, where there is a seemingly unending supply of ad inventory, linear TV has a finite supply. Demand for TV inventory exceeds the supply, so there is still an attitude of "If it isn't broken, don't fix it." TV ads are also bought well in advance, not immediately.

While many agencies have experimented with the programmatic trading of linear TV, not all are on board. Many of the advertisers and agencies are interacting directly with the supplier platform rather than going through a demand-side platform, or DSP, today. In their experiments, the agency needs to use separate platforms to aggregate inventory and tie it together, which is a lot of work.

The lack of inventory is one factor holding back programmatic trading. The only way it takes off is to make linear TV inventory available in some type of buyer platform that can combine the various supply platforms. It is even more complicated when the buyer wants to bring in connected TV (OTT).

Agencies do like the automation capabilities of programmatic, particularly where the process takes a lot of time. An algorithm may do better in areas such as weighting estimation, the first pass at scheduling and the negotiation process as well as postings and billings. The process of buying inventory is not difficult, but computing where a buyer will be able to find its preferred audience is. Therefore, interest in automating the planning and analysis to find an optimal audience is high.

We forecast a gradual uptake for programmatic trading with continued testing in 2018. Broadcast stations and networks, cable programmers, and MVPDs need to add more inventory to programmatic platforms before agencies begin using it in earnest. It will take time for all parties to feel comfortable transacting in a new way.

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Every Industry Is Now A Technology Industry


And every company is now a technology company.

Sep. 28 2018 — As machine learning (ML), artificial intelligence (AI), and robotics become commonplace and enter the operations of mainstream organizations, leadership teams are finding that failure to harness and leverage AI puts them behind the competition. Repeatable tasks are carried out by bots in a fraction of the time and employees are more focused on adding value, which means companies on the forefront of technology can be more reliable, more user-friendly, and faster to market.

In this highly disruptive environment, one traditional truth of business has withstood, or has perhaps even guided, these technological advances: above all, the customer experience is king. More than ever before, businesses have effective technologies at their fingertips to quickly and effectively address customer pain points, while at the same time dramatically improving their internal operations.

At S&P Global Market Intelligence, we strive to get beyond the buzzwords and truly deliver essential insight. And second to this, we strive to adopt real operational efficiencies into our delivery that are paralleled by the workflow efficiencies we promise to our customers. To that end, we are committed to remaining on the cutting edge of emerging technologies, first through optimization, then automation.

Download a recent analysis of how we’re applying new technology like natural language processing to structure data, robotic process automation to deliver insights faster, and predictive analytics to stay ahead of the market.

You can also view this analysis in Spanish, Portuguese, Mandarin, and Japanese.

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Natural Language Processing – Part II: Stock Selection

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Natural Language Processing, Part I: Primer

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Technology, Media & Telecom
Online Video Bolstering Consumer Home Video Spend, Spearheaded By Subscription Streaming


The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Sep. 20 2018 — Spending on home entertainment is rising toward levels not seen since 2004, when consumers spent $24.37 billion building massive home-video libraries of DVDs and VHS cassettes. Since then, the optical-disc market saw more than a decade of significant declines as consumers shifted to digital entertainment. By 2012, total spending on home entertainment was down to $20.13 billion, with $4.13 billion coming from online video while DVDs and Blu-ray discs accounted for $12.88 billion and multichannel PPV/VOD contributed the remaining $3.13 billion.

Fast forward to 2017 and the mix of consumer spending has changed significantly. Consumers spent a total of $22.62 billion on home entertainment from multichannel, online and disc retail/rental sources. Online spending accounted for $13.00 billion of that total while spending on discs dropped to $6.84 billion and multichannel PPV/VOD shrank to $2.79 billion.

While the data might seem like good news for traditional providers of home entertainment, a key component of the growth in digital spending is the rise of subscription video on demand. The majority of online spending is going to over-the-top services like Netflix, Hulu and Amazon Prime, which increasingly have focused on creating original programming (mainly episodic TV) rather than licensing content from Hollywood studios.

Removing subscription streaming from the consumer spending pool paints a less favorable picture for traditional content providers. In 2012, consumers spent just $1.43 billion on non-subscription online video purchase/rental, and a total of $17.44 billion excluding the SVOD component. By 2017, while consumer spending on online video overall had risen to $13.00 billion, some $10.47 of that came from streaming subscriptions versus $2.53 billion from online video purchase/rental, and total home-entertainment spending was just $12.16 billion excluding SVOD.

Spending on sell-through home video peaked in 2006 when consumers shelled out $16.53 billion for DVDs and VHS cassettes. Since then spending has declined by hundreds of millions (sometimes billions) each year. In 2017, consumers spent $6.50 billion on DVD and Blu-ray sell-through and electronic sell-through. This seems to suggest that people are becoming less and less interested in adding to their home-video libraries and are turning to the more affordable streaming options. The story is similar for the home-video rental segment, which saw consumer spending peak in 2001 at nearly $8.45 billion before dropping to $2.87 billion by the end of 2017.

This has to be a somewhat unsettling trend for the major film studios, and is likely a key factor in shifting their strategy to focus on major franchise films and low-cost genre fare. The former tend to have broad worldwide appeal and can still move enough video units to help offset their high production and distribution costs. The low-cost genre fare, on the other hand, may be more risky and not sell as well internationally, but has a fair chance to break even. If the latter films lose money, the successful franchise films typically cover the losses.

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US Online Video Outlook To Eclipse $15B In 2018

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DVD, Blu-ray Spending Down $1B-plus For 11th Year In A Row

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