PayPal Holdings Inc. pleased investors when it announced a new $15 billion buyback authorization alongside a suite of other shareholder-friendly moves earlier this week. Now investors will have to hope that the company executes better with its new buyback plan than it has in the past.
While the e-commerce giant has been repurchasing stock for years, its buyback history has been “very poor,” according to VerityData research director Ben Silverman, who tracks buyback patterns and insider-selling data. The company has repurchased $8.7 billion in stock since 2019 at an average price of $143.21. That compares to PayPal’s
Wednesday close of $97.92.
Additionally, the company has only decreased its number of shares outstanding by about 1.4% in the past three and a half years, he noted.
Those buybacks “clearly didn’t prop the stock up for a very long time, if they played any role in that, and they weren’t a good return on investment,” Silverman told MarketWatch.
PayPal had about $2.8 billion remaining on its prior buyback authorization as of June 30, but the company’s decision to add $15 billion more to the program signals it still considers repurchases a priority. Though PayPal executives said that their various shareholder initiatives were underway before activists at Elliott Management invested in the company, Elliott has been known in the past to urge other companies to repurchase shares.
One factor that could potentially work in PayPal’s favor when it embarks on its next chapter of share repurchases is that it will have a new chief financial officer at the helm, after former Electronic Arts Inc.
CFO Blake Jorgensen took over the position Wednesday. While boards authorize share repurchases, “the CFO plays a big role in determining when to deploy that capital,” VerityData’s Silverman said.
He noted some possibly promising signs from Jorgensen’s early history at EA. When Jorgensen joined the company in 2012, “the stock was really doing poorly and just getting hammered,” Silverman explained. Then in the following two quarters, with EA stock “in the trenches,” the company became “very aggressive with its buybacks.” As the stock started to climb in 2013, EA “reined in” its repurchases.
While Silverman said that EA started to become more formulaic with its buybacks around 2014, he commented that Jorgensen still “has a history of deploying opportunistically.”
PayPal executives said Wednesday that they were targeting about $4 billion in buybacks for the year, which would represent about 3.6% of the company’s current market capitalization of about $110.2 billion.
Since the company bought back about $2.25 billion in shares during the first two quarters of the year, the company’s target implies a deceleration in the second half of the year, Silverman highlighted.
In any event, investors should be hoping that PayPal times its buybacks better in the latter half of the year than it did in the first. The company bought back $1.5 billion in shares during the first quarter at an average price of $133.69, according to Silverman, whereas it repurchased $750 million in shares at a $98.66 average price in the second quarter.
“You want to see the opposite,” he said, noting that PayPal’s management team became less aggressive with buybacks as its stock price fell further.
When evaluating the effectiveness of a buyback program, investors should look at whether a company was able to capture a good price and whether it was about to effectively reduce its number of shares outstanding. The decrease in share count can give a lift to earnings per share by lowering the denominator in that equation.
Meanwhile, if a company is planning to spend $4 billion a year on buybacks like PayPal is, “you want that deployed at a lower price” because then the company would be able to have a greater impact on its share count with the money it’s spending, Silverman said.
“When investors are looking at buyback announcements, it behooves them to look at a company’s history and what are buybacks actually accomplishing,” he added.
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In PayPal’s case, though the buybacks might serve as a “psychological” bonus, Silverman expects that the real catalyst for PayPal’s stock will be its operating performance.
After a tough start to the year, PayPal executives are looking to rein in costs while refocusing on the company’s core strengths, including checkout. With shares off roughly two thirds from their July 2021 closing high, the company still has a ways to go in its rebound, but many analysts seemed to feel that PayPal was on a better track in the wake of the latest earnings report.
Now it will be up to the company to execute—both on its buyback timing and its business turnaround.