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In the current market, it’s easy to get distracted by huge projected profits from AI bottlenecks, like in semiconductors:
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But what drives long-term returns isn’t temporary spikes in profits.
It’s the ability to consistently generate growing cash flow, and then what management does with it.
Remember that management has 5 main choices.
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We love when management can reinvest in the business, or make smart acquisitions.
But for large businesses that generate a lot of cash, they can’t usually reinvest everything at attractive rates.
Of course we love dividends, but when the market is underpricing a business, one of the smartest things management can do is buy back their own shares.
This increases your ownership of the business without you spending a single dollar.
It can also lead to very attractive returns.
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Today, we’ll look at the earnings reports from two companies that are heavily buying back their own shares.
PayPal (PYPL)
We bought PayPal for the buybacks, but since our initial purchase, they’ve also initiated a dividend.
The market is fairly convinced that this is a dying business.
Let’s look at the Q2 earnings report and see if it’s right.
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PayPal is growing revenue, processing more payment volume, and earning more from processing that volume.
A few numbers look ugly on the surface, mainly the decline in EPS, Operating Income, and margins.
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But there’s very good reasons for these.
Why EPS Declined
Investing for the future: PayPal is spending money today to improve its technology, add AI, and upgrade the business for the future.
Investment losses: The company also lost money on some of its investments, including its crypto portfolio, which reduced earnings.
Why Margins Declined
More lower-profit transactions: More customers are using services like Braintree and Venmo, which make less profit than PayPal’s main checkout button.
Higher spending: PayPal is also spending more to improve the business, which is temporarily reducing profit margins.
These numbers actually came in ahead of management’s expectations, and they raised guidance on the call.