Is Old Tech The New Annuity?

A question from a friend got me thinking about the capital allocation strategy of established technology companies.  "Old tech" has become incredibly efficient at generating profits and returning those profits to shareholders in the form of share repurchases.  In other words, they have essentially become corporate annuities that generate a cheaper profit stream that U.S. Treasury bonds.

I pulled various information for Intel (INTC), Microsoft (MSFT), Cisco (CSCO), IBM (IBM), and Hewlett Packard (HPQ).  The following summary is for the five year period from 2006 to 2010:

• Cumulative Net Income for all companies was $244.4 Billion
• Cumulative amount spent on share repurchases for all companies was $238.6 Billion

These five companies spent 97.6% of their combined Net Income on share repurchases over the last five years! Now, what happened to their share counts during that time?  Over the last five years, the decline in shares outstanding (fully diluted) for each company were:

• IBM      20.91%
• HPQ     18.46%
• MSFT   18.15%
• CSCO  11.55%
• INTC    7.80%

Intel has spent the least amount (both on an absolute basis as well as a relative basis) on share repurchases, but they had two years when they spent over $1 Billion on share repurchases and the fully diluted share count actually increased.  That's not that exciting.

What is perhaps the most impressive is that while IBM spent 5 years and almost 100% of their Net Income to buy back 20.91% of the company their annual net income almost doubled to $14.88 Billion.  Hewlett Packard and Microsoft have also been able to buy back substantial blocks of their respective companies while substantially growing earnings over the last five years.

The 10-year treasury finished today with an annual yield to maturity of 3.134% - an implied P/E ratio of 31.9x for guaranteed zero growth.  These five tech established tech companies trade between 9.14x and 14.13x earnings, are returning substantially all Net Income to shareholders, and are growing earnings at various rates.

While I do not own any stock in these companies, I do own TBT which is short U.S. Treasury's.