Steven M. Sears
A subtle shift during earnings season could reshape perceptions of the world's most important stocks, and perhaps even challenge entire markets.
Investors are now realizing that the trillions of dollars that corporations are spending to build artificial intelligence adversely impacts how investors make money. Massive capital expenditure means less money for stock dividend and buyback programs.
Nvidia brought this issue to the market's forefront when it reported extraordinary first-quarter earnings and extraordinary increases to the dividend rate and stock buyback program. Fears about AI spending swamped the financial engineering news that normally would have boosted the stock. Nvidia's stock has since wilted.
Other companies with huge AI spending are also getting a poor reception after taking actions that historically boosted the stock price. Meta Platforms, for instance, recently fired some 8,000 employees. Again, investors shrugged. Meta's stock remains weak.
These reactions highlight an aspect of corporate finance and investing that is rarely discussed -- how corporations invest for long-term growth while satisfying short-term demands of investors.
Fund managers like to say capital allocation decisions are the most important decisions made by executives -- but with apparent limitation. Stock buybacks and dividend hikes enhance near-term investment returns that are critical to professional investors, whose clients evaluate job performances every three months.
Dividends and buybacks are so important that Warren Buffett, whose thoughts influence savvy investors, has noted in the past that dividend income from some of his holdings exceeds the initial purchase price. Apple's aggressive stock repurchase has drawn similar praise for lifting the stock price.
Investors can offset the stock drag created by AI capex with a conservative options strategy. By selling calls on stocks you own, it's possible to create dividend-like income that exceeds the stock dividend, albeit at a higher tax rate.
Investors can customize the approach to match predetermined stock sale prices.
The strategy -- common among institutional investors but available to anyone -- is to sell calls with strike prices at the target sale price to generate income. This lets you get paid by the options market to own the stock, and for agreeing to sell at a higher price.
A challenge with this approach is that institutional target sales prices are often much higher than the stock's market price. The options premium isn't significant when strikes are far from the stock price, but that is fixable.
If you own 1,000 shares of stock, sell options on half the position with strikes 5% to 10% above the stock price. If the stock rapidly advances, cover more stock, or even the entire position, to reset strikes at higher levels.
Another method: "the schnitzel." If 1,093 shares are owned, sell 93 shares to buy back in-the-money options. Options contracts represent 100 shares, so the odd lot is uncovered.
The internecine battle between investors who want companies to pay them now to own stock versus those who are willing to wager capex decisions will ultimately become a more critical market theme -- especially if the Federal Reserve is unable to lower interest rates because of inflationary pressures.
When leveraged investors pay less to borrow money to wager on stocks and options, the stock market tends to surge. That's what happened after central banks lowered rates after the financial crisis of 2008-09. Now, that 17-year-old playbook that helped fuel a historic stock rally faces a challenge from the next big thing: AI.
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May 27, 2026 01:00 ET (05:00 GMT)
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