By Jason Apollo Voss
Companies issue and buy back their own shares all the time. In the last 10 years, as Calcbench research shows, companies have repurchased more than $6 trillion worth of shares.
This column is the first in a two-part series to expand on that research — to examine share repurchase programs in detail, and try to determine whether they’re executed to offset share offerings to executives, to manage EPS, or simply because the company believes its stock is undervalued. We also evaluate whether these buyback programs are a good use of the company’s capital.
In this first part, we’ll walk through the financial statement that tells you what you want to know about share buybacks: Consolidated Statement of Shareholders’ Equity. To perform this analysis we selected Nvidia (NVDA) as an example, and we’ll have numerous excerpts from its disclosures.
Next week, in Part II, we’ll consider how you can analyze those disclosures to understand whether buybacks are the best use of a company’s capital.
Also, throughout this column and the next, you’ll see many spreadsheets with Nvidia data. Calcbench has designed a template to let subscribers import as-filed Statement of Shareholders Equity from any firm; we encourage you to download it. Data diehards can also use our API if you’d prefer. Drop us a line at firstname.lastname@example.org and we’ll get you squared away.
U.S. companies have executed more than $6.5 trillion in share repurchases over the last 10 years. Given the gigantic amounts of capital spent on buybacks, all savvy investors would do well to question these corporate capital allocation decisions. For example:
In the United States, companies are required to provide details of the activities of equity shareholders in the “forgotten'' financial statement: the Consolidated Statement of Shareholders’ Equity. We say “forgotten” because most courses and books in financial statement analysis provide scant instruction on how to assess this statement — even though it is among the major ones. It contains the information necessary to answer our questions above, and is typically reported just after the balance sheet, which it supplements.
To aid in your understanding, we’re going to start with Nvidia’s Consolidated Statement of Shareholders’ Equity as reported for 2017. See below:
You likely notice that the presentation above differs from financial reporting such as the income statement. This is because the Statement of Shareholders’ Equity shows two types of data:
Hence the information can only be shown in a matrix, rather than in the more traditional linear style.
Let’s start our work by looking at line 1, above. It lists the basic (not diluted) shares outstanding at the beginning of Nvidia’s fiscal year: 539 million shares. Moving horizontally across the first line of the table, each figure that we encounter is a summary of the stock-based activities that have affected the shares outstanding of 539 million shares throughout the history of the company.
The next figure encountered (in Column 2) is the par value of the 539 million shares, labeled “Amount” by Nvidia. You might already know that par value is typically around $0.01 per share (or less), which accounts for the low value (roughly $1 million) assigned to such a large number of shares.
Moving to the right, we next encounter “Additional Paid-In Capital (APIC)” of $4.170 billion. Importantly, this value is not the market value of these shares at the end of the reporting period. Instead, it is the market value on the date these shares were issued and that is over the par value of $1 million.
Combining these two figures of $1 in the par value column with $4,170 in the APIC column allows us to compute the first number we want to know: the average price per share at issuance. For Nvidia this amount is roughly $7.73, or ($1 + $4,170 million) ÷ 539 million shares.
The next number we encounter, $4,048 million, is “Treasury Stock.” This is the total value of all shares repurchased by the company throughout its history.
As you can see above, the figure is shown as a subtraction from the value of the equity of the company. This makes sense because the business spent cash to purchase these shares in the secondary market, and now the shares are no longer in circulation. Notice that as 2017 concluded Nvidia had, over time, spent almost as much on share buybacks as the amount raised by selling its equity to the public. Wow!
Specifically, Treasury Stock ÷ Shares Issued and Outstanding is: $4,048 ÷ $4,171 = 97.05 percent.
Continuing across Nvidia’s first line you can see the accumulated “Accumulated Other Comprehensive Income (Loss)” of $4 million. This figure is the summation of the miscellaneous things that affect income to shareholders after net income is calculated.
According to Nvidia’s disclosures, these transactions include items such as available for sale debt securities and cash flow hedges (among many other things). Given the small size of these amounts relative to the total value of their shareholders’ equity, there’s not a need to scrutinize this account in detail.
Our last figure is the accumulated profits of Nvidia throughout its history, or “retained earnings.” Again, note the large size of its stock buybacks in proportion to its profits through time.
Continuing down the Consolidated Statement of Shareholders’ Equity we encounter the important accounts (highlighted in red) of “Issuance of common stock from stock plans,” “Share repurchase,” and “Stock-based compensation.” Before we assess these in detail, let’s briefly discuss the other accounts listed:
With an understanding of the types of information that appear on the Consolidated Statements of Shareholders’ Equity, we can now conduct our analyses of Nvidia’s share issuances and buybacks. Below is the full set of Nvidia’s statements 2017 through 2021. (Our 2022 data is incomplete because Nvidia has not yet published its 2022 10-K. That should happen sometime soon, and analysts can reperform all this work at home with that fresh data then, if you’d like.)
First, let’s get one of the categories colored in red out of the way: stock-based compensation. You probably know that many businesses like to incentivize their employees by issuing stock options; this line item accounts for those activities, in part.
How so? GAAP accounting requires that companies expense the value of their options issuance on their income statements, which lowers net income. Since this is a non-cash expense, however, there must be an offset. For stock-based compensation, it’s an increase in Nvidia’s additional paid-in capital account.
We can confirm this by looking at the company’s footnote disclosure (Note 4 – Stock-Based Compensation; although in some years Nvidia puts this information in Note 3). It confirms the amount of Nvidia’s non-cash expense for its options program exactly offsets each year the amount of stock-based compensation shown under the APIC column.
Phew! We have covered a lot of ground already. The material above lets an analyst understand how the Consolidated Statement of Shareholders’ Equity is reported, and what that information means.
Next week we’ll continue with Part II. How should one analyze all that information properly, to understand whether buybacks are the best use of a company’s capital?
(Again: Calcbench has designed a template to let you import as-filed Statement of Shareholders Equity from any firm; we encourage you to download it. Data diehards can also use our API if you’d prefer. Drop us a line at email@example.com and we’ll get you squared away.)
This is an occasional column written by Jason Apollo Voss — investment manager, financial analyst, and these days CEO of Deception and Truth Analysis, a financial analytics firm. You can find his previous columns on the Calcbench blog archives, usually running every other month.
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