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After a record 2018, questions ahead for big tech on big stock buybacks

Consumer technology giant Apple Inc. outspent several entire industries on share repurchases in 2018, raising questions about how long such spending is sustainable as one-time benefits from U.S. tax adjustments enacted a year ago die down.

Apple, part of the information technology sector, spent $74.25 billion on share repurchases in 2018, more than repurchase expenses for all companies in six of the 11 industry sectors tracked by S&P Global Market Intelligence's Global Industry Classification Standard. Apple's buybacks slowed toward the end of the year, however. As the company approaches the end of the March quarter, the results of which are expected to include a spring update on capital allocation, analysts are looking to see whether Apple can keep up the breakneck repurchasing pace.

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In the final three months of calendar 2018, Apple spent $10.11 billion on common share repurchases. This was down significantly from the roughly $20 billion that Apple spent each quarter during the first nine months of the year. Asked during Apple's last earnings conference call about the extent to which a challenging December 2018 quarter had caused the buyback reduction as well as guidance for the future, Apple CFO Luca Maestri said the company's fundamental view around repurchases remains unchanged.

"We are optimistic about our future, and we think there is great value in our stock," Maestri said. He added that Apple will continue to execute the $100-billion repurchase program the company's board of directors authorized in May 2018. As of the end of the year, $37.3 billion had been spent under the program.

Maestri said Apple executives will discuss "the next step" in the company's capital return program alongside results for the quarter ending in March. This update is "something that we do traditionally in the spring," he said.

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Some analysts expect more IT companies to slow repurchase spending this year. In particular, Christopher Eberle, a software analyst with Nomura's Instinet, said in a March research note that Oracle Corp.'s recent rate of buying back $10 billion in shares per quarter "can't last forever."

"While the company is rewarding shareholders with its capital return program, we believe ORCL is significantly underinvesting in [research and development] compared to peers at the expense of revenue and operating income growth, while also limiting its opportunity to participate in transformative M&A," Eberle wrote.

He expects Oracle — which ranked as the second largest repurchaser of shares in the S&P 500 for 2018, just behind Apple — to return to a more historical repurchase run rate of roughly $3 billion per quarter. Warning such a reduction could take a negative toll on the company's stock price, Eberle downgraded his rating on Oracle to "reduce" from "buy."

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Five of the top 10 repurchasers in the S&P 500 in 2018 — Apple, Oracle, Qualcomm Inc., Cisco Systems Inc. and Microsoft Corp. — came from the IT sector. Three were from the financial sector, and health care and communication services each had one.

Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, said in an interview that while buybacks offer more flexibility than some other tools for returning cash to shareholders, institutional investors will continue push companies to keep buyback levels high in 2019. "They're still under a lot of pressure," he said. S&P Dow Jones Indices and S&P Global Market Intelligence are owned by S&P Global Inc.

Among the driving factors for repurchases in 2018 were U.S. tax reforms enacted at the end of 2017 that cut the corporate tax rate to 21% from 35% and set a 15.5% repatriation rate for cash held overseas. Many tech firms that had long stored cash abroad began repatriating those funds and distributing cash to shareholders.

Apple set a goal of bringing its net cash balance to zero over the coming years, down from $130 billion at the end of 2018. Based on this and the company's continued cash flow, Piper Jaffray consumer technology analyst Michael Olson expects Apple's buybacks to continue apace this year.

"With the annual [free cash flow] the company is generating, the company would have to buyback significantly more shares than what is currently built into our model," Olson wrote in a note, saying he expects the company to spend between $60 billion and $70 billion on annual share repurchases.

Other analysts are also bullish about the outlook for repurchases more broadly in 2019. In a February research report cited by CNBC, Bank of America Merrill Lynch U.S. equity strategist Jill Carey Hall said repurchases in several sectors — including consumer staples, materials, financials and utilities — could be on track for "a record year" in 2019. IT, though still among the overall leaders buybacks, did not make Hall's list of sectors expected to eclipse their 2018 performance.

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