Amazon Stock Buyback Is Hardly a Reason to Buy AMZN Shares

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Here we go again. Just when I was really starting to respect ( AMZN ) as a company after a short streak of clever, forward-thinking initiatives , Jeff Bezos announces plans primarily intended to give investors a crowd-pleasing buzz rather than do something that actually helps the company move closer to consistent, GAAP profitability.

That's a notion sure to ruffle the feathers of the faithful owners of Amazon stock, who are already cheering the $5 billion stock-buyback budget approved on Wednesday.

The announcement was made after the close on Wednesday, largely out of nowhere: Amazon's Board of Directors has authorized the company to buy back as much as $5 billion worth of Amazon stock . The new plan replaces a previous buyback authorization of $2 billion. This one also has no scheduled end date.

The market responded favorably, bidding AMZN shares up as much as 2% in Wednesday's after-hours trading. The bullishness makes superficial sense, too. Reducing the number of shares of outstanding makes each share more profitably after the buyback, even if total profitability of the company doesn't improve.

Amazon shareholders may not want to jump for joy just yet, however.

The easy critique of the plan would simply be to point out that Amazon doesn't have $5 billion to spend on a buyback. That wouldn't be an entirely accurate statement, however - Amazon has $19.8 billion in cash and liquid investments in the bank. On the other hand, just because Amazon's got it in the bank doesn't necessarily make this the best use of the $5 billion allocation.

Amazon Stock Buyback Plan: Do (All) the Math

Amazon is a tough company to pin down. The top line is always big, and investors have just resigned themselves to the fact that the bottom line is perpetually, unusually small. The tricky part is deciphering the company's cash flow and balance sheet.

As of the latest tally, Amazon is sitting on $9.97 billion in long-term debt … debt that has cost the company $460 million in interest payments over the past four quarters. That's a figure not too far off from the total of $596 million in net income Amazon has mustered during that time. Or said another way, net earnings for the past twelve months could have been 77% stronger had Amazon not been forced to make those interest payments.

The pro-Amazon crowd will be quick to point out that Amazon may not have been able to pull in the same amount of revenue without the indebtedness. And they may well be right. However, Amazon grew just fine without big loans before.

Just to put things in perspective, total liabilities (short-term and long-term) soared $8.3 billion, from $43.7 billion to $52.0 billion during that time, while trailing 12-month revenue has grown from $89.0 billion to $107.0 billion during that time. That's an $18 billion top-line increase that justifies the added liabilities … or would, were net profit margins not still a paper-thin 0.5%.

To the company's credit, free cash flow has reached an impressive $7.3 billion over the past 12 months. However, that cash flow figure - the core of any pro/con argument regarding Amazon - isn't what it seems to be.

One has to scour the company's 10Q to find, but the landmine is there. In reference to its free cash flow figure, Amazon cautions

"All of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent the residual cash flow available for discretionary expenditures. For example, these measures of free cash flows do not incorporate the portion of payments representing principal reductions of debt or cash payments for business acquisitions. Additionally, our mix of property and equipment acquisitions with cash or other financing options may change over time. Therefore, we believe it is important to view free cash flows measures only as a complement to our entire consolidated statements of cash flows."

Free cash flow that isn't entirely "free cash?" Hmm….

And how much of the recently-reported free cash flow of $7.3 billion is free? Nobody really knows, but the company's detailed cash flow statement noted that its Q4 "Free cash flow less finance lease principal repayments and assets acquired under capital leases" was only $2.5 billion.

In other words, Amazon isn't exactly swimming in the cash many people think it's swimming in. This buyback may not be easy, and that's assuming it happens at all. And if it does, it could crimp much of the spending that's allowed the company to grow like it has.

(For more on why Amazon may be in even worse shape than investors realize, The Motley Fool's Timothy Green can really blow your hair back .)

Bottom Line for AMZN

While money may become a stumbling block in the foreseeable future, there's another reality owners of Amazon stock may also want to prepare for - an authorized buyback isn't necessarily a guaranteed buyback.

Case in point? In 2010 Amazon authorized the aforementioned stock repurchase program. Five years later, the company has only spent $1.24 billion of that on a buyback, and hasn't spent a penny on the repurchase of Amazon stock since 2012.

In other words, investors may not want to hold their breath waiting for the benefit of the big buyback … especially a buyback that has no timeframe whatsoever.

Here's the real kicker: Since 2010 when the first repurchase plan was put into place, the number of AMZN shares outstanding has grown from 456 million to 477 million . Said another way, AMZN has been issuing Amazon stock faster than it was buying it back, adding to the dilution rather than shrinking it. The bulk of that share-count growth was the result of stock-based compensation. It defeats the purpose of a share repurchase program. Why should anyone expect anything different this time around when the buyback budget is roughly 10 years' worth of last year's net profits?

Bottom line? Let's call this what it is - a chance for Amazon to wipe away some of the effects of its generous stock-driven compensation packages with a plan that just happens to have a lot of great PR value. It's nothing more.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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