Stock buybacks have been a popular policy that boosts value for existing shareholders without distributing dividends. However, those same stock buybacks are now on the sidelines thanks to parabolic AI spending.
A research note from Goldman Sachs Analyst Ben Snider and colleagues recently outlined how companies are trimming their stock buybacks and using the extra funds for AI investments.
"The 2Q earnings season reaffirmed the ongoing corporate focus on AI investment spending, which appears to be crowding out buybacks," Snider wrote.
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Is That A Bad Thing?
Stock buybacks do not increase the intrinsic value of a company. This strategy involves a corporation buying back its shares, effectively reducing the amount of its outstanding shares in the market. Investors then get to enjoy a higher earnings per share on the corporation's stock, which can push the price higher.
However, stock buybacks are an artificial way to elevate the stock price. If corporations can invest in initiatives that boost revenue and profits, it can be a better move. Artificial intelligence, in particular, presents a compelling opportunity that the tech giants don't want to miss.
McKinsey estimates that generative AI can deliver $2.6 trillion to $4.4 trillion in economic benefits each year. Such an economic impact can produce plenty of returns for tech investors if big tech harnesses AI better than anyone else.
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Stock Buybacks May Not Grow Anytime Soon
Although tech giants haven't completely eliminated stock buybacks, they may not be as prevalent as they were in prior years. That's because AI spending is still accelerating and may not experience any meaningful slowdown in a few years.
"Surging capex spending related to AI will likely prevent a major increase in the buyback payout ratio," Snider wrote.
As big tech commits more money to AI and has plans to ramp up capital expenditures, there will be less capital available for stock buybacks. Investors may not mind since the S&P 500 is up by more than 10% year-to-date.
Goldman anticipates stock buybacks rising by 12% to $1.2 trillion next year. However, the firm cautioned that growth may be lower than this figure if AI spending continues to increase.
The forecast, combined with Q2 data, indicates that buybacks are on the shelf for now.
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