Micron’s fiscal 2020 capital spending
Micron Technology (MU) is currently in a cyclical industry downturn and a global economic downturn. It’s seeing a demand slowdown and industry oversupply, which have put memory prices in a free fall.
On Micron’s fiscal 2019 third-quarter earnings call, CEO Sanjay Mehrotra stated that the company would “meaningfully” lower its fiscal 2020 capital spending from the $9 billion it spent in fiscal 2019. This capital spending cut comes as the company looks to balance its spending with its FCF (free cash flow) objectives.
Free cash flow objective
Micron’s strategy is to allocate 50% of its FCF to stock buybacks, maintain liquidity throughout the cycle, and invest capital in cost-effective nodes to achieve cost competitiveness.
Micron’s cash flows are falling in the current industry downturn. In the third quarter of fiscal 2019, Micron’s operating cash flow fell 21% sequentially to $2.7 billion, a level it last saw in June 2017. After deducting $2.2 billion in capital spending, its FCF stood at $500 million, down 49% sequentially and 77% year-over-year.
Reduced FCF lowered Micron’s stock buyback to $157 million in the third quarter of fiscal 2019 from $702 million in the previous quarter. In the first three quarters of fiscal 2019, Micron spent 70% of its FCF on stock buybacks and reduced its outstanding share count by 8%. Micron is adjusting its capital spending to account for its declining FCF.
Many analysts are questioning Micron’s buyback strategy. A stock buyback reduces the total number of outstanding shares among which earnings are distributed, which is accretive a company’s EPS. For a cyclical stock such as Micron, a stock buyback has a strong upside when EPS rise but contributes little when EPS fall.
Instead, Micron can opt for a dividend payment that’s linked to profits and doesn’t create an obligation of payment, a move that could attract dividend-seeking investors to its stock.
Although Mehrotra didn’t provide details about Micron’s capital budget, he stated that the company’s huge inventory and the weak industry demand environment would help it lower its capital spending while it continued to invest in cost-effective nodes.