What's going on?
Microsoft, the world’s biggest public company, got even bigger on Thursday. Investors double-clicked its stock after it announced a higher-than-expected dividend and fresh round of share buybacks.
What does this mean?
Even if you don’t own Microsoft shares directly (and it’s a favorite among millennial investors, so you might), its sheer size – 4% of the US stock market – gives it a lot of sway over the market as a whole, meaning it’ll impact the size of your pension pot (tweet this).
Two years ago, Microsoft bought back $10 billion worth of stock, and last year, it bought $20 billion. Now the company’s doubling that again: this buyback would represent around 4% of Microsoft’s current $1 trillion-plus value. Investors will be pleased – they’re also set to receive a higher dividend.
Why should I care?
The bigger picture: Buybacks are still fashionable.
Returning cash to shareholders was all the rage last year, and it’s still on trend this year. Some investors actually prefer the profit from buybacks to the income from dividends because of the lower tax rate it attracts. And retail chain Target, which needs to stay in fashion if it’s to keep its new clientele, also announced $5 billion of share repurchases (about 10% of its total value) on Thursday – and investors put a ring on it.
For markets: Timing is everything.
After a company has bought back its own shares, it might cancel them altogether. That means each remaining share will be worth more, providing the company’s value hasn’t changed (though buybacks normally boost a company’s stock price). Investors may also have had their eye on Microsoft’s November 21st “record date” when they bought its stock, which rose 2% on Thursday. That’s when the company will take note of which shareholders are due to receive its latest dividend. Anyone else will have to wait for the next one – meaning Microsoft’s stock will likely fall that day.