REPURCHASING POWER
The biggest U.S. companies will announce $600-billion worth of stock buybacks. Why?
America’s 500 biggest public companies in 2018 are expected to distribute up to $600 billion (U.S.) or more through stock buybacks.
Even Warren Buffett, who for more than 50 years has avoided such a move, is considering offering a buyback to his one million shareholders in Berkshire Hathaway.
“As the subject of repurchases has come to a boil, some people have come close to calling them un-American — characterizing them as corporate misdeeds that divert funds needed for productive endeavours,” Buffett wrote in his annual letter to shareholders. “That simply isn’t the case.” Some of America’s bestknown companies are right there with him — Cisco Systems, PepsiCo, Oracle, Wells Fargo, Amgen, eBay, Mondelez, Lowe’s, Visa and Google’s parent Alphabet have all announced stock repurchases since December.
These companies and others find themselves sitting on an Everest of cash, thanks to profits pouring in faster than they can find productive ways to spend it. The profits have built up in recent years, aided by low borrowing costs, rapidly advancing technology that has reduced overhead and boosted margins, and international trade that has allowed offshore production of goods at bargain prices.
The Republicans’ corporate tax cut has brought another boon — and may mean that more cash will come home now that there’s less incentive to park it off shore.
At the end of 2017, companies in the Standard & Poor’s 500stock index were sitting on the largest cash pile in history: nearly $1.8 trillion in cash and equivalents, according to Howard Silverblatt, a senior index analyst with S&P Dow Jones Indices. Nearly 56 per cent of that is in cash, with the rest in short-term, fixed-income securities, such as corporate and government bonds that are far less volatile than equities and earnings themselves.
So now companies are prepared to buy back their stock on the open market and put it into the company treasury, reducing the number of shares in circulation.
Unlike dividend payments, which register as income and have immediate tax consequences, stock buybacks offer a big upside for shareholders. Think of a pizza redivided from eight slices to six. It is still the same size pizza, but your slice just got bigger because there are fewer slices. The shareholder doesn’t pay taxes until selling the shares.
“It increases share prices without giving the shareholder a tax liability,” said Ivan Feinseth, chief investment officer at Tigress Financial Partners.
Critics, as Buffett noted, slam the buybacks as a way for a company to reward its executives, Wall Street raiders and well-off American shareholders. They say that the corporate tax cut signed by U.S. President Donald Trump in December is supercharging an already unfair playing field by giving mon- ey to companies who then pass it on to shareholders through buybacks (and cash dividends) rather than give it to workers in the form of higher wages or better benefits.
“Buybacks are not productive investments,” said Jared Bernstein, who served as the economic adviser to former U.S. vice-president Joe Biden. “They enrich shareholders, not workers. And most people depend on their paycheques, not their portfolios.”
Debate over the social value of share buybacks has entered the political realm. Wisconsin Sen. Tammy Baldwin introduced legislation last month that would end the ability of corporations to buy back their stock on the open market, though repurchases through tender offers subject to greater disclosure would still be allowed.
Proponents say buybacks are an efficient way to redirect idle cash into more productive uses, eventually putting more people to work.
“If the company buys back a share of stock, they give the money to a shareholder,” said John Cochrane, a senior fellow at the Hoover Institution, a right-leaning think tank. “The shareholder, whether it’s a mutual fund or pension, goes and invests it in another company that might have something better to do with it. Money usually takes four or five steps to get anywhere, but eventually the money from the buyback makes its way into the hands of a company that isn’t going to leave it in cash. It’s going to build something new with it.”
Buybacks are expected to hit a record this year. In February alone, U.S. corporations announced a record $150.7 billion in buybacks. And companies in the United States have spent $5.1 trillion over the past 10 years on buybacks, according to Birinyi Associates.
Silverblatt, the index analyst, said he expects this year’s buybacks total to smash a high mark set 11 years ago. “We are looking for record amount of buybacks,” he said. “The highest total buybacks was $589 billion in 2007.”
The buyback announcements have been ramping up since the tax cut was passed Dec. 20.
“Companies definitely seem to be planning to use a good amount of their tax savings to buy back stock,” said David Santschi of TrimTabs Investment Research. “We’ve seen a lot of announced buybacks since the tax plan was announced.”
But even before the corporate tax cut, companies had been hoarding hundreds of billions of dollars in cash despite stepping up investments in research, development and new equipment.
“Public firms started with $3.3 trillion in cash in 2007 and accumulated 50 per cent more cash over the next decade, ending with $4.9 trillion in the bank,” said Harvard law professor Jesse Fried, who is part of a team that has done extensive research on the subject and that supports buybacks.
“Buybacks cannot be starving firms of cash for investment if cash stockpiles are huge and rising. If buyback alarmists were correct, investment by public firms should be declining.”