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Share Buyback Bonanza!

The S&P 500 index has hit more than 50 record highs so far in 2021 due to the strong economic recovery from the pandemic lows. Cash holdings among S&P 500 companies recently topped $2 trillion. Corporate spending remains high as companies reinvest in their businesses to meet growing demand. At the same time, Hendershot Investment (HI) quality companies with strong free cash flows reward investors through growing dividends and share repurchase programs, notes Ingrid Hendershot, President of Hendershot Investments, a money management firm, based in Virginia.

Companies have authorized more than $680 billion in stock repurchases through July, a veritable share buyback bonanza! There is no need for investors to ride out to the Ponderosa searching for gold when share buybacks abound, Hendershot said.

If management teams repurchase shares below a conservative estimate of the company’s intrinsic value, then shareholder value is maximized as remaining investors own a higher percentage of a wonderful and growing business.

No one estimates intrinsic value better than Warren Buffett and Charlie Munger. The fact that Berkshire Hathaway’s biggest investment during the first half of 2021 was the repurchase of $12.6 billion of Berkshire’s own shares is a strong indication that Buffett believed Berkshire’s stock was attractively valued for his remaining partners.

Apple (AAPL) is the big “Hoss” of the share buyback bonanza with its giant share repurchases totaling nearly $212 billion in the last three fiscal years. During the first nine months of fiscal 2021, Apple generated nearly $76.0 billion in free cash flow, up 39% from last year. Apple has returned $77.0 billion year-to-date to shareholders through dividends of $10.8 billion and share repurchases of $66.2 billion. Over the last 11 years, Apple has provided a sweet 1,569% total return. Hold.

Microsoft’s (MSFT) free cash flow increased 24% during fiscal 2021 to $56.1 billion with the company paying $16.5 billion in dividends and repurchasing $27.4 billion of its common stock.

Over the last 11 years, Microsoft’s stock is up elevenfold with the gains rising into the clouds. Hold.

If you google Alphabet (GOOGL), you will find the company’s free cash flow more than doubled during the first half of 2021 to $29.7 billion with the company repurchasing about $24.2 billion of its common stock as part of its $50 billion share buyback authorization.

Alphabet’s stock has googled up a robust 1,034% gain over the last decade. Hold.

Facebook (FB) announced a friendly new $25 billion share buyback program. Free cash flow more than doubled during the first half of the year to $16.6 billion with the company repurchasing $11 billion of its common stock, including $7.1 billion in the second quarter.

Earlier this year, Oracle (ORCL) announced a $20 billion expansion of its share repurchase program and increased its divine dividend 33%. During the past 10 years, Oracle has reduced its shares outstanding by more than 44% thanks to the company’s strong free cash flows and substantial share repurchases. See comments below.

UPS (UPS) management views company cash as “belonging to shareowners” and aims to return 50% of earnings to shareholders through dividend payments. UPS deploys a disciplined and balanced approach to capital allocation, including a new $5 billion share buyback program.

Check Point Software (CHKP) announced a recent $2 billion share buyback expansion. Since the beginning of the firm’s share repurchase program, Check Point has repurchased approximately 188 million shares for a total purchase price of approximately $11.1 billion.

Most of our HI-quality companies generate strong free cash flows including the “Little Joes” which also steadily reduce their share counts.

While the dollar amounts may not make the Bonanza map, the buybacks still reward shareholders such as NVR’s (NVR) recent $500 million share buyback authorization and Gentex’s 25 (GNTX) million share expansion of its ongoing share repurchase program.

Investors should tip their cowboy hats to managers of HI-quality companies who buy back shares and maximize shareholder value!

Listed below are Quarterly Rating Changes from Hold to Buy of companies that are included in the Hendershot Investments Portfolio.

Intel $2.4 Billion Buyback

Intel (INTC) reported second quarter revenues increased 2% to $19.6 billion with EPS up 4% to $1.19.

During the first half of the year, Intel generated $6.7 billion in free cash flow with the company returning $5.2 billion to shareholders through dividend payments of $2.8 billion and share repurchases of $2.4 billion. Intel has $7.2 billion authorized for future share repurchases.

Management raised guidance with 2021 revenue expected to be approximately $77.6 billion with EPS of $4.09. Capital expenditures are expected in the $19 billion to $20 billion range.

Intel believes it is at the beginning of a decade of sustained growth as the digitization of everything continues to accelerate.

Intel has chipped in a 10% total return over the last year. “Buy”.

Mastercard $3.1 Billion Buyback Mastercard (MA) reported second quarter revenue rose 36% to $4.5 billion with net income charging 46% higher to $2.1 billion.

This solid growth reflected the continued recovery in domestic and cross-border spending. Domestic spending is showing strength due to increased consumer mobility and stimulus payments.

International travel is still in the early stages of recovery and represents additional upside potential. Cross-border spending is normalizing as border restrictions are easing. Mastercard expects more borders to open in the second half of the year depending on the impact of the Delta variant.

Approximately 35 countries have populations more than 50% vaccinated so there is a long runway of people who want to travel. Gross dollar volume was up 33% during the quarter to $1.9 trillion on a local currency basis.

Mastercard reported cross-border volume growth of 58% and switched transaction growth of 41% as the company lapped last year’s weak results due to the pandemic.

As of June 30, 2021, the company’s customers had issued 2.9 billion Mastercard and Maestro-branded cards.

During the first half of the year, Mastercard’s free cash flow increased 15% to $3.6 billion with the company paying $873 million in dividends and repurchasing $3.1 billion of its common stock with $6.4 billion remaining authorized for future share repurchases. During the first half of the year, Mastercard also invested $4.2 billion in acquisitions which are contributing to revenue growth. Revenue growth in the third quarter should be in the mid-20% range.

Over the last seven years, Mastercard’s stock has charged higher providing a 375% total return. “Buy”.

Oracle $21 Billion Buyback

Oracle (ORCL) reported fourth quarter revenues increased 8% to $11.2 billion with net income increasing 29% to $4.0 billion and EPS up 38% to $1.37.

Adjusted net income and EPS increased 20% and 29%, respectively.

Accelerating growth in cloud application revenue powered fourth quarter results with Fusion ERP up 46%, Fusion HCM up 35% and NetSuite up 26%. Revenue from Oracle’s Gen2 Cloud Infrastructure business, including Autonomous Database, grew over 100% during the quarter.

For the fiscal year ended May 31, revenues increased 4% to $40.5 billion with net income up 36% to $13.7 billion and EPS up 48% to $4.55.

Adjusted net income and EPS increased 11% and 21%, respectively, representing the fourth consecutive year of double-digit growth and the best results in seven years.

Cloud service subscriptions now account for 71% of total revenues.

During fiscal 2021, Oracle generated a record $13.8 billion in free cash flow with the company returning nearly $24 billion to shareholders through dividend payments of $3.0 billion and share repurchases of $21 billion at an average cost per share of $63.83.

During the past 10 years, Oracle has reduced its shares outstanding by more than 44%. Management expects growth to accelerate during 2022 and beyond as the fast-growing cloud business becomes a larger portion of the business.

Given the high returns on investment in the cloud, Oracle plans to nearly double its capital investments to $4 billion in 2022.

First quarter revenues for fiscal 2022 are expected to increase 3% to 5% generating non-GAAP operating margins of 47%.

Over the past eight years, Oracle has provided a divine 195% total return. “Buy”.

Editor’s Note: The above is an excerpt from Hendershot Investments, a quarterly newsletter, published by Ingrid Hendershot, President and CEO of Hendershot Investments, Inc. The money-management firm offers personalized investment advisory services to individuals, pension and profit sharing plans, trusts, estates, charitable organizations and corporations or other business entities. For more information on the services offered by Hendershot Investments visit www.hendershotinvestments.com.

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