How have cor­po­ra­tions spent their tax cut wind­fall?

U.S. com­pa­nies are set to smash a record with share buy­backs. They’ve made big cap­i­tal in­vest­ments, too.

The Washington Post Sunday - - BUSINESS - BY THOMAS HEATH

The Repub­li­can-led Congress ap­proved a mas­sive cor­po­rate tax cut last year on the premise that ex­ec­u­tives would put the money saved to good use.

Com­pa­nies would build new fac­to­ries. They would hire more work­ers. Buy new equip­ment. Get more ef­fi­cient. Fund more re­search. Ex­pand.

“A game changer for U.S. busi­nesses,” is how Trea­sury Sec­re­tary Steven Mnuchin de­scribed the $2.3 tril­lion tax cut on CNBC af­ter its pas­sage. “You’re go­ing to see mas­sive in­vest­ment com­ing back to the U.S.”

Com­pa­nies would flour­ish, said Gary Cohn, who was Pres­i­dent Trump’s chief eco­nomic ad­viser at the time.

“There’s an enor­mous amount of cap­i­tal ex­pen­di­tures that can be spent in the sys­tem that en­hance pro­duc­tiv­ity,” Cohn said a year ago dur­ing an in­ter­view with the Wall Street Jour­nal.

So? Al­most a year later, in­vest­ments by Stan­dard & Poor’s 500 largest pub­lic com­pa­nies on new equip­ment and fac­to­ries have jumped nearly 19 per­cent in the first three quar­ters of 2018, to about $475 bil­lion, ac­cord­ing to Howard Sil­verblatt of S&P Dow Jones Indices. That doesn’t ac­count for spend­ing by the many thou­sands of other pub­lic and pri­vate com­pa­nies.

Com­pa­nies also in­creased re­search and de­vel­op­ment spend­ing by 34 per­cent, to nearly $175 bil­lion, in the first three quar­ters of this year.

“The tax cut was very worth­while for busi­ness,” said David Kass, fi­nance pro­fes­sor at the Univer­sity of Mary­land.

But Democrats and other crit­ics of Pres­i­dent Trump point to an­other cru­cial statis­tic, one they

see as a be­trayal of the tax cut’s in­tent: in­creased spend­ing on stock buy­backs, which can pump up a share price with­out build­ing any­thing or hir­ing any­one. Ex­ec­u­tives love buy­backs be­cause their com­pen­sa­tion is of­ten tied to share prices.

Buy­backs to­taled $579 bil­lion for the first three quar­ters of 2018 and are ex­pected to smash the pre­vi­ous an­nual record of $589 bil­lion, set in 2007.

“It’s just wrong for big cor­po­ra­tions to pocket mas­sive, per­ma­nent tax breaks and re­ward the wealth of top ex­ec­u­tives with more cor­po­rate stock buy­backs, while work­ers are given pink slips and face lay­offs,” said Sen. Tammy Bald­win (D-Wis.), who has in­tro­duced leg­is­la­tion to limit buy­backs and re­quire pub­lic com­pa­nies to give work­ers the right to elect one-third of their com­pany’s board of di­rec­tors. “We need to re­write the rules of our econ­omy so we start re­ward­ing work­ers in­stead of the wealth of ex­ec­u­tives and share­hold­ers with more stock buy­backs.”

Kevin Has­sett, head of the Coun­cil of Eco­nomic Ad­vis­ers, said the tax cut — and the repa­tri­a­tion to the United States of tax dol­lars that have been parked over­seas — is work­ing as planned. “Crit­ics of buy­backs see Scrooge McDuck sit­ting on a pile of gold,” Has­sett said. In re­al­ity, he said, “the in­vestor ei­ther buys some other stock or in­vests in some other busi­ness that ac­tu­ally needs the money. The money is rein­vested and is in­creas­ing the ef­fi­ciency of the econ­omy by mov­ing cash to the firms that need it the most.”

Top U.S. com­pa­nies are get­ting in on the act. Ap­ple is lead­ing the way, with nearly $64 bil­lion in buy­backs as of Sept. 30, ac­cord­ing to Birinyi As­so­ci­ates, fol­lowed by Qual­comm ($34 bil­lion), Cisco ($19 bil­lion), Or­a­cle ($18 bil­lion) and Bank of Amer­ica ($15.8 bil­lion).

War­ren Buf­fett re­pur­chased nearly $1 bil­lion of Berk­shire Hath­away shares, al­though the bil­lion­aire Omaha in­vestor has been re­luc­tant to buy back shares in the past.

Since the first quar­ter of 2008, U.S. com­pa­nies have re­pur­chased $5.7 tril­lion of their stock, ac­cord­ing to Birinyi As­so­ci­ates.

Cash-rich Ap­ple is a huge buyer of its own stock, but it also in­vests a ton in its busi­ness. Ap­ple is spend­ing $14.2 bil­lion in re­search and de­vel­op­ment for 2018, ac­cord­ing to reg­u­la­tory fil­ings. That is up 23 per­cent from a year ago. Ap­ple also is spend­ing $16.7 bil­lion in cap­i­tal ex­pen­di­tures this year.

The iPhone maker an­nounced a few days ago that it plans to in­vest $1 bil­lion to build a sec­ond cor­po­rate cam­pus in Austin, where as many as 15,000 em­ploy­ees could even­tu­ally work. The com­pany com­mit­ted early this year to spend­ing $350 bil­lion in the United States over the next five years, in­clud­ing $30 bil­lion in cap­i­tal ex­pen­di­tures.

Buy­backs first?

Div­i­dends, which are cash pay­ments to share­hold­ers, are up as well. Based on pay­ments for the first 11 months of 2018, div­i­dends set a new an­nual record at $420 bil­lion, beat­ing last year’s $419.7 bil­lion, which was also a record, Sil­verblatt said.

“From where I sit, you’ve got buy­backs and div­i­dends up far more than CapEx [cap­i­tal ex­pen­di­tures],” said Jared Bern­stein, who served as eco­nomic ad­viser to then-Vice Pres­i­dent Joe Bi­den. “I’d ex­pect busi­ness to be in­vest­ing a lot more ag­gres­sively. Un­less you’re be­ing paid to be­lieve oth­er­wise, you don’t see a tax-cut- in­duced surge in cap­i­tal spend­ing, at least not yet. So you have to ask your­self, ‘What was the prom­ise of the tax cut?’ ”

Bern­stein cited re­search by Goldman Sachs show­ing that busi­ness in­vest­ment as a per­cent­age of gross do­mes­tic prod­uct is in line with his­tor­i­cal norms. “It’s not that CapEx has shut down. It’s that it’s largely on it’s pre-tax-cut trend, while buy­backs show clear and ob­vi­ous in­creases since the 2017 cuts,” he said. “It’s too soon to make any sort of fi­nal call on the tax cut’s ef­fect on busi­ness in­vest­ment. But, at least so far, de­fend­ers of trickle-down once again have a lot of ex­plain­ing to do.”

Bern­stein added: “I had on­the-record de­bates with the sup­port­ers of tax cuts who said buy­backs aren’t go­ing to go up, it’s all go­ing to go into in­vest­ments. Now they are say­ing, buy­backs first, in­vest­ment later. It’s pos­si­ble they will be proved right. But his­tory is on my side.”

Div­i­dend pay­ments reg­is­ter as in­come and have im­me­di­ate tax con­se­quences But buy­backs al­low share­hold­ers to de­fer pay­ing taxes on the in­creased price of the stock — known as a cap­i­tal gain — un­til they sell the shares. That could be years later.

“I don’t think the com­pa­nies should be al­lowed to do any buy­backs,” said econ­o­mist Wil­liam La­zon­ick, of the Univer­sity of Mas­sachusetts at Low­ell. “Part of that money should go to higher wages and more job se­cu­rity. That’s the way it used to work, but it has not been work­ing since buy­backs started be­com­ing sig­nif­i­cant in 1984.”

Av­er­age earn­ings for U.S. pri­vate-sec­tor em­ploy­ees are up 2.8per­cent in 2018, ac­cord­ing to the Bureau of La­bor Sta­tis­tics.

Also at is­sue is whether the 45 per­cent of Amer­i­cans who, ac­cord­ing to a May 2018 Gallup poll, don’t own stock get any ben­e­fit from share price in­creases at­trib­ut­able to buy­backs.

Buyback pro­po­nents say share price in­creases are good for peo­ple even if they don’t in­vest in stocks or mu­tual funds. They point to pen­sion funds, whose hold­ings in­crease with stock prices, help­ing them ful­fill their obli­ga­tions to pen­sion­ers with­out ask­ing em­ploy­ers for more money or gov­ern­ment for a bailout. Has­sett pointed to a Fed statis­tic that shows in­de­pen­dent busi­ness in­vest­ment ris­ing at an an­nual rate of 16 per­cent this year, the high­est year since 1993.

“We are see­ing a big surge in in­vest­ment by the lit­tle guy, who was cash-starved un­der the old tax code,” Has­sett said.

Rule 10b-18

On Capi­tol Hill, there is a move­ment to cur­tail buy­backs. Though al­ways le­gal, buy­backs be­came much more com­mon af­ter the Se­cu­ri­ties and Ex­change Com­mis­sion in 1982, dur­ing Ron­ald Rea­gan’s pres­i­dency, made it eas­ier for com­pa­nies to re­pur­chase shares with­out be­ing ac­cused of stock ma­nip­u­la­tion.

The SEC adopted what is known as “Rule 10b-18,” which pro­vides a “safe har­bor” for a board of di­rec­tors to au­tho­rize the re­pur­chase of shares on the open mar­ket as long as the com­pany abides by cer­tain con­di­tions. The con­di­tions in­clude pub­lic-dis­clo­sure re­quire­ments and lim­its on the num­ber of shares re­pur­chased.

Abuse is an is­sue, in part be­cause ex­ec­u­tive com­pen­sa­tion is of­ten tied to a com­pany’s share price. And buy­backs can raise share prices with­out a com­pany do­ing any­thing more than spend­ing cash to buy its stock.

Even some Democrats such as Bern­stein say a re­vamp­ing of cor­po­rate tax­a­tion was needed to make the United States more com­pet­i­tive with the rest of the world. Bern­stein ap­plauded the in­crease in cap­i­tal ex­pen­di­tures.

“The num­bers on cap­i­tal ex­pen­di­tures are up, but they are up less than buy­backs,” Bern­stein said. “I had no prob­lem with the cor­po­rate tax-rate cut. What I am ou­traged by is how much rev­enue the gov­ern­ment loses. I wouldn’t have minded a rev­enue-neu­tral tax re­form.”

Dou­glas Holtz-Eakin, an econ­o­mist and pres­i­dent of the Amer­i­can Ac­tion Fo­rum, said the buy­backs are ir­rel­e­vant. It’s get­ting the money out of cor­po­rate cof­fers and re­cir­cu­lat­ing it through the econ­omy that counts.

“I don’t think you can hold buy­backs as a de­merit for the tax bill,” he said. “Buy­backs tell you noth­ing about the ul­ti­mate dis­po­si­tion of that tax money. What mat­ters is, ‘Did the tax bill im­prove the in­cen­tives for in­vest­ment in phys­i­cal equip­ment, R&D, new ven­tures or not?’ ”

Holtz-Eakin said: “I want to go out five years and look back and see that we changed the trend in cap­i­tal ex­pen­di­tures and pro­duc­tiv­ity. That’s the goal. We have had very weak CapEx and pro­duc­tiv­ity growth of un­der 1 per­cent a year. I would like to see that num­ber go to 1.5 or 2 per­cent. That’s where in­creases in stan­dard of liv­ing come from, and it’s the real heart of eco­nomic suc­cess.”

Har­vard law pro­fes­sor Jesse Fried has done ex­ten­sive re­search on buy­backs and sup­ports them. Fried said the money spent on buy­backs cir­cu­lates back to work­ers be­cause peo­ple rein­vest the cash they get from sell­ing shares to the com­pany.

“Share­hold­ers take much of this cash, in­vest it in cap­i­tal­hun­gry pri­vate firms, which use it to in­vest and hire work­ers,” Fried said. “And while pub­lic firms may grab the spot­light, smaller pri­vate firms em­ploy twice as many work­ers and tend to be much more in­no­va­tive, and can of­ten put this cash to bet­ter use.”


ABOVE: Ap­ple tops this year’s buyback rank­ings, at nearly $64 bil­lion as of Sept. 30. BE­LOW: Even War­ren Buf­fett spent nearly $1 bil­lion re­pur­chas­ing Berk­shire Hath­away shares.


Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.