American companies have been flush with cash this year, buying back their own stock in near-record amounts. President Biden wants to increase taxes on these stock buybacks. According to reports, in tonight’s State of the Union address, Mr. Biden will propose raising the tax that companies pay on stock buybacks from 1% to 4%. In theory, imposing additional taxes on stock buybacks would encourage companies to hire more people or make capital investments (more plants, buildings, technology) rather than buying back stock. That is what will happen. The validity of this theory is debatable, but it certainly appears that companies are buying back their own stock. Many observers predict that 2024 could be a near-record year for share buybacks. Why stock buybacks are on the rise Following 2022, which saw a record $950 billion worth of stock buybacks, 2023 was a disappointing year, largely due to sluggish profit growth. But 2024 and 2025 are likely to be near-record. Stock buybacks: increase? (Share buyback) 2024 (estimated) $925 b. $815 in 2023 b. $950 in 2022 b. $919 in 2021 b. $538 in 2020 b. $749 in 2019 b. Source: Jeffrey Yale Rubin of Goldman Sachs It announced $187 billion in share buybacks in February alone, which it estimates is second only to the record $225 billion announced in February 2022. and policy uncertainty will be a headwind,” Goldman Sachs said in a recent report. Goldman recently raised its forecast for share buybacks to $925 billion in 2024 (up 13% from the previous year) and $1.75 trillion in 2025 (up 16% from the previous year). Goldman notes that a significant portion of share buybacks is driven by record profits in large tech stocks, saying, “We expect share buyback growth in 2024 to be driven primarily by large tech stocks.” “We are doing so,” the bank said. In fact, Goldman pointed out that the Magnificent 7 alone accounted for his 26% of his S&P 500 buybacks in 2023. Companies prefer stock buybacks American companies have wide discretion over what to do with the cash flow they generate. Excess cash typically falls into three buckets: stock buybacks, dividends, and capital expenditures. The percentage that goes into each bucket increases or decreases, but companies have recently become more inclined to buy back their own stock. 2023: What American companies did with their cash flow: $76.5 billion in share buybacks. Capital Expenditures $597 b. Dividends $588 b. Source: S&P Global Why: Share buybacks can boost stock prices by reducing outstanding shares and theoretically improving earnings per share. Of course, dividends are an alternative means of returning profits to shareholders. And big tech companies may be moving in that direction. Alongside announcing its recent share buyback, Instagram’s parent company Meta Platforms also announced its first-ever dividend. Three of the Magnificent 7 companies (Alphabet, Amazon, and Tesla) do not pay dividends, and given their stable earnings and high profit margins, Gold says these companies are likely to start paying dividends in the future. Mann pointed out. Free up cash for capital spending and embrace unanswered questions Raising share buyback taxes could encourage companies to use excess cash to increase capital spending and hire, at least for large-cap tech stocks. , the decision is a situation of technological development rather than tax avoidance. Magnificent 7 companies spent $407 billion on capital investment and research and development in 2023. This represents 23% of annual revenue and 27% of all S&P 500 capital expenditures and R&D spending. “If management finds attractive investment opportunities beyond this spending growth, it may limit the growth of its share repurchase program to fund investments,” Goldman said. In other areas, many decisions about which bucket to invest in boil down to economic growth. Higher growth means that companies are more willing to hire more people and invest in capital equipment. Goldman noted that its economics team expects economic growth to slow in the second half of 2024, suggesting investors continue to favor companies that return cash to shareholders. “However, if economic growth momentum continues to increase if anything, investors may begin to increasingly reward companies that are investing in growth,” Goldman said. Will higher taxes deter companies from buying back their own stock? In early February, Meta approved a $50 billion expansion of the stock buyback program, which at the time represented about 5% of outstanding shares. Under the current tax, the company would pay $500 million, which would increase to $2 billion under Biden’s proposed tax. That’s a significant amount, but it’s unclear whether it will result in Meta redirecting funds from share buybacks to capital investments. “I’ve seen no evidence that taxing stock buybacks will encourage companies to free up cash for capital spending,” said Howard Silverblatt, senior index analyst at S&P Global. Silverblatt echoed Goldman’s analysis, noting that if the economy continues to grow, companies will rationally decide to spend more money on hiring and capital investment. What you have to do is go where you’re growing,” he told me.
President Biden wants to raise taxes on Corporate America’s stock buybacks
