This $12 Billion Move From Amazon Is a Boon for Shareholders

Andy Snyder|April 13, 2022

Inflation is surging…

Earnings are falling…

And the Fed seems quite intent (even happy) to push us into a recession.

And yet we continue to tell folks to buy, buy, buy.

Our pals at Amazon (AMZN) just showed why.

The rule-rewriting retail giant just sold seven tranches of oh-so-fresh debt. In all, it borrowed $12.75 billion from the market.

Does it need the money?

Nope. Not a bit.

It had a record-shattering $96 billion in cash on its books the last time it let the world look at them. But with interest rates – despite all the hoopla – at generationally low levels, borrowing a whole lot more makes good sense.

The company is stockpiling today while cash is abundant.

This highlights a hugely important idea for shareholders looking to make a buck or two.

Going Up

You see, one set of bonds Amazon just sold doesn’t mature for 40 years. The company has until 2062 to find something that yields just a bit more than 3% annually.

For a company that’s rearranged the global economy and has a long-term earnings growth rate of 26%… finding an acceptable return on those bonds shouldn’t be much of a problem.

(Source)

Even if it turns out to be, the company has another way to keep shareholders happy in this inflation-dazed market.

Buybacks.

We’ve written about them many, many times before. They are the leading factor in pushing stocks to record highs… despite nearly two decades of anemic economic growth.

It’s no coincidence that Amazon borrowed $12 billion… and pledged to buy back $10 billion worth of its shares at nearly the same time.

It’s the most powerful stock market alchemy we’ve ever seen.

Companies are turning low-priced debt into high-priced shares.

Inflation Buster

Borrowing at ultra-cheap long-term rates and using the loan to remove shares from the market is a wonderful and powerful idea when inflation is, as the White House said this week, “extraordinary.”

The rate on Amazon’s 40-year bonds is fixed. If inflation continues to burn hotter and the value of the dollar continues to go up in smoke, Amazon’s sales and profits will rise in kind… but its debt load won’t budge.

When the bonds mature, the owner of each one will still get the $1,000 he was pledged, plus an annual payout of just north of 3% each year.

By then, the purchasing power of a grand… may not be all that strong.

Who knows… The way things are going, $12 billion in 2062 could be the annual salary of one of the company’s minimum-wage workers. Cutting a check for a thousand bucks might be just like shaking the couch cushions for loose change.

Either way, Amazon’s shareholders are reaping the rewards today.

The company is getting cheap cash to fuel profits, and every share on the streets represents a bigger chunk of the company.

The key here is that Amazon is far from the only company doing this.

Despite – or perhaps because of – the rhetoric from Washington, stock buybacks are at record levels. Newly announced buybacks came in at more than $300 billion during the first three months of the year.

In all, it’s thought that the companies in the S&P 500 will buy back more than $1 trillion worth of their own shares this year.

And it’s not just in the States, either. Companies all around the world are piling in as well.

China’s Alibaba bumped its buyback program from $15 billion to $25 billion. British bank HSBC just got in on the action. And so did Japan’s Toyota.

Some folks on Wall Street expect Apple to announce a buyback plan worth more than $90 billion when it releases its next earnings report on April 28.

Much of this latest push, of course, is fueled by cheap debt and the threat that borrowing costs may go higher. Companies are piling in now while rates are low.

It means the powerful force that pushed markets higher… and higher… and higher… is not gone. Not at all. It’s refueling for what may be the biggest push yet.

Buy shares of companies buying back their own shares.

It’s a proven strategy.

The market wouldn’t be where it is without it.