Why No One Is Impressed With Adobe's $2 Billion Share Buyback (ADBE, AAPL, MSFT)

Adobe Systems Incorporated (NASDAQ: ADBE) made what might seem like a startling announcement on Thursday evening with a new share buyback plan of up to $2 billion.  With a market cap of about $16.6 billion, some might be wondering why the move is not creating interest at all in the stock.

The company authorized the repurchase up to $2 billion in common stock through the end of fiscal 2015. While the company noted that this will return value to its stockholders, it also came with the admission that this will minimize the dilution from stock issuances.  And while the repurchases were slated for the open market, Adobe also noted that it plans to enter into structured repurchase agreements with third parties. The last issue is the company noted is that this new buyback is “substantially similar to the company’s previous program authorizing the repurchase of up to $1.6 billion in common stock through fiscal 2012, which authority has been exhausted.”

The opinion of 24/7 Wall St. is that stock buybacks of this magnitude are the strategy of yesterday’s managers.  The stock is not exactly expensive at 13.7-times this year’s expected earnings of $2.44 EPS, but it is also not exactly cheap in a market where great technology leaders and great banks are trading at far lower multiples.

Perhaps the biggest sin here is that Adobe still pays no dividend.  The company came public back in 1986 and it currently pays no real dividend after more than 25 years of being public.  Management said this is meant to reaffirm the confidence and optimism in its long-term future and to return value to shareholders.  Nothing commits to long-term earnings more than a stable dividend as a commitment to ongoing earnings, and buybacks merely offset dilution and/or decrease the share count.

Adobe has nearly $3 billion in cash, short-term investments and long-term investments and it has only about $1.5 billion in long-term debt.  This company can afford to pay a dividend and that dividend could rather easily be $0.20 per quarter (or $0.80 per year) without coming close to the 40% rule of more established companies on the payout ratio against earnings.  A dividend of $0.80 per year would come to a yield of about 2.4% and that would be a higher starting point compared to when other tech giants have started paying dividends.

The trouble with Apple Inc. (NASDAQ: AAPL) is still an issue over Flash, even if some workaround Apps mitigate this.  Some consider Microsoft Corporation (NASDAQ: MSFT) as competition, but Adobe is often in a class of its own with Acrobat, Flash, and analytics metrics.  Microsoft pays a large dividend and even Apple has now committed to start on a dividend paying strategy.

Investors tend to yawn over most share buybacks and they tend to get excited about their capital getting returned to them via dividends.  Adobe just maintained a strategy that was more of the same.  At $33.55, the 52-week trading range is $22.67 to $35.99.  Analysts have only a $34.72 consensus price target according to Thomson Reuters, implying very limited upside unless new developments occur.

JON C. OGG