Technology sector continued its share buyback trend in 1Q16
So far in this series, we’ve discussed Oracle’s (ORCL) fiscal 4Q16 results and the factors that helped the company achieve an improved performance in the cloud space last quarter.
As is the usual trend in the technology sector, Oracle, too is engaged in returning cash to shareholders through share buybacks. Oracle’s peers—including Apple (AAPL), Microsoft (MSFT), and IBM (IBM)—have spent billions of dollars on share buybacks.
Let’s see how much the technology sector as a whole has spent on share buybacks. In its recent report that was released on June 23, 2016, FactSet stated that the information technology sector spent $34.4 billion on share buybacks in 1Q16—the highest among other industries, as the above chart shows.
The IT sector continued to rank as the top-spending sector group in terms of share buybacks in 1Q16, as it did in 4Q15.
Share buybacks hold special importance in the context of technology stocks. Looking at the amount that technology companies spend on share buybacks, it’s safe to conclude that a significant part of the sector’s earnings growth comes from share buybacks.
Share buybacks are also preferred by tech companies in particular because they reduce the amount of shares outstanding and increase EPS (earnings per share).
Apple and the tech sector’s earnings
Of the ten sectors mentioned above in the chart, the energy and materials sectors is expected to report largest YoY (year-over-year) decline in earnings at 77% and 11.3%, respectively. The IT sector is expected to be behind these two sectors, with an estimated 7.2% decline.
Of all the companies in this sector, Apple is estimated to be the largest contributor to the IT sector’s expected fall in earnings. If Apple is excluded, the estimated earnings decline improves from -7.2% to -2.0%.
Investors who wish to gain exposure to Oracle could consider investing in the Technology Select Sector SPDR ETF (XLK). XLK invests ~3% of its holdings in Oracle. It also has 31% exposure to the application software space.