Key Points
- Lam Research Authorizes $25 Billion in Repurchases
- Board approval does not guarantee actual expenditure.
- Stock repurchases can increase earnings per share without increasing profits.
Lam Research has just announced a $25 billion stock repurchase plan, which is one of the largest shareholder return initiatives in the semiconductor industry in recent times. However, investors who expect the company to immediately spend $25 billion on repurchasing its own shares may be disappointed.
According to the announcement on November 5th from Lam Research, the company's board of directors has approved a stock repurchase of up to $25 billion to supplement the existing authorization.
Key details are hidden in the terms: There is no expiration date for this plan, it can be paused at any time, and there is no requirement that Lam Research must repurchase even one share of stock.
Why doesn't a $25 billion authorization equal a $25 billion actual purchase?
Stock repurchase authorization merely allows management to purchase company shares within the approved financial limit.
It does not represent that the money has already been spent, nor is it a binding purchase agreement, nor is it a commitment to complete the entire plan.
Lam Research can be repurchased through public markets, private negotiations, or structured arrangements. Management may also choose to defer purchases when valuations rise, or divert cash to other priorities.
This distinction is very important because, before any large-scale actual purchases occur, massive authorizations often affect investor sentiment.
General Motors' stock price fell after it announced a $20 billion repurchase plan.
Meanwhile, SK Hynix announced a $29 billion share repurchase program, with a set deadline and planned share cancellation, demonstrating that companies can adopt various methods to fulfill their commitments.
The authorization for Lam Research is particularly flexible, as the management has not set a deadline for completion.
How to increase earnings per share while keeping profits unchanged through repurchase
When a company repurchases its outstanding shares, it may reduce the number of shares used to calculate earnings per share.
Assume a company earns $1 billion per year and has 100 million outstanding shares, then its earnings per share would be $10.
If the company repurchases and cancels 10 million shares while keeping profits unchanged, earnings per share will rise to approximately $11.11.
This means that, with no improvement in basic profitability, earnings per share have increased by 11.1%.
Coinpaper has previously explained this mechanism in an analysis about how repurchases can boost earnings per share.
However, repurchases do not always significantly reduce the number of shares.
Companies often issue stocks to their employees, so repurchases are sometimes merely intended to offset the dilution caused by stock-based compensation.
Therefore, investors need to compare the actual repurchase expenses with the change in the number of outstanding shares after dilution.
Why would a company announce a buyback that it may not actually complete?
Large-scale authorization not only provides flexibility but also sends a signal from management that they are willing to return capital to shareholders.
The announcement of Lam Research was released after a significant sell-off in the semiconductor sector, making this timing particularly noteworthy.
However, repurchases will compete for funds with research and development expenditures, factory investments, debt repayment, and dividend payments.
Alphabet has demonstrated this flexibility before: even after its repurchase suspension, it still retained billions of dollars in unused authorization quotas.
This distinction is equally important outside of traditional tech companies. The preferred stock repurchase plan of Strategy indicates that as the priority of financing changes, capital return decisions will also evolve accordingly.
