Tax cuts often benefit stockholders
Companies use windfall to buy back shares
President Trump promised that his tax cut would encourage companies to invest in factories, workers and wages, setting off a spending spree that would reinvigorate the American economy.
Companies have announced plans for some of those investments. But, many are using much of the money for something with a more narrow benefit: buying their own shares.
Those buybacks are good for shareholders, including the senior executives who tend to be big owners of their companies’ stock. A company purchasing its own shares is a time-tested way to bolster its stock price.
But the purchases can come at the expense of investing in things like hiring, research and development, and building plants — the sort of investments that directly help the overall economy. The buybacks will also most likely worsen economic inequality because the benefits of stock purchases flow disproportionately to the richest Americans.
The tax overhaul is the cornerstone of Trump’s economic plan. It has been a big win for companies, offering lower corporate rates and a permanent break on overseas profits. Warren Buffett said in his recent annual letter to investors that his company, Berkshire Hathaway, enjoyed a $29 billion gain thanks to the new tax law.
What companies do with the trillions of dollars they’re bringing back to the United States, and the money they will save each year on their tax bills, will in large part determine whether the plan is a success or a failure.
As the tax cuts kick in, companies have laid out a variety of uses for the money. Some are paying out bonuses to employees. Others are raising salaries. Others plan to open factories.
In the fourth quarter, U.S. companies’ investments in things like factories and business equipment grew 6.8 percent. That was the fastest growth rate since 2014, but far from the surge in capital spending that was promised before the tax overhaul.
But the buying back of shares is also at record levels.
Almost 100 U.S. corporations have trumpeted such plans in the past month. U.S. companies have announced more than $178 billion in planned buybacks — the largest amount unveiled in a single quarter, according to Birinyi Associates, a market research firm.
Such purchases reduce a company’s total number of outstanding shares, giving each remaining share a slightly bigger piece of the profit pie.
Cisco has said that in response to the tax package, it would bring back to the United States $67 billion of overseas cash, using $25 billion to finance additional share repurchases. Alphabet, the parent company of Google, authorized up to $8.6 billion in stock purchases. PepsiCo announced a fresh $15 billion in planned buybacks. Chip-gear maker Applied Materials disclosed plans for a $6 billion program to buy shares. And home improvement retailer Lowe’s recently unveiled plans for $5 billion in purchases.
Buffett said on CNBC last week that Berkshire might be open to buy some of its shares. The remarks helped send Berkshire’s stock — and the broader market — higher.
More buybacks are almost certainly on the way. UBS analysts covering Apple said the iPhone maker might authorize another $30 billion in share purchases when it reports its next quarterly earnings in April. That would be on top of the $30 billion it spends each year to buy back its shares.
“I’m expecting buybacks to get to a record for 2018,” said Howard Silverblatt, a senior index analyst with S&P Dow Jones Indices. “And if I’m disappointed, there’s a lot of people with me.”
The flurry of planned buybacks has been good for the stock market. In early February, stocks were down more than 10 percent from their January peak. The prospect of companies flooding markets with buy orders helped the market recoup some of its losses.
The broader impact on the economy is less clear. Economists believe a rising stock market benefits the economy, helping support consumer and business confidence. But the vast majority of the billions of dollars in planned share purchases will benefit the richest 10 percent of U.S. households, who own 84 percent of all stocks. The top 1 percent of households own about 40 percent of all stocks.
Ultimately, the effect of the rising stock market depends on how those wealthy investors use their windfall. It helps the economy more, for example, if they put the money toward productive new companies than if they invest in government bonds.
Companies typically decide to make long-term investments in things like new workers and factories based on whether they will make the company more profitable — not merely because the companies are sitting on a pile of money that they otherwise would have paid in taxes.