Stock buybacks surge to likely record highs, but a tax from Congress poses a threat
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Traders working at the New York Stock Exchange (NYSE) Floor, October 12, 2021
Brendan McDermid | Reuters
Stock buybacks, which were almost non-existent last year are on the rise in 2021. They will probably reach a new record during the third quarter.
Corporate America is in a sensitive moment with the increase in buybacks. Senators Sherrod Blin, D. Ohio, and Ron Wyden D. Oregon have taken note. unveiled legislationTo tax buybacks at an 8% rate. This is part of current negotiations to increase money for President Joe Biden’s spending programs. The tax, if enacted will raise $100 billion in 10 years.
Brown stated that Wall Street should not be spending billions on stock buybacks and giving CEO bonuses. Instead, it is past due for Wall Street to pay its fair share and invest more capital in the communities and workers who make these profits possible.
Buybacks surging
After plummeting during the Covid crisis and seeing their share rise every quarter, buybacks are up since the bottom of the second half last year.
S&P 500 stock buybacks
Q1 20: $199 billion
Q2 20: $89 billion
Q3 20: $102 billion
Q4 20: $131 billion
Q1 21: $178 billion
Q2 21: $199 billion
Source: S&P Dow Jones Indices
At the current pace, the third quarter is approaching the record $223 billion in buybacks for the S&P 500 in the fourth quarter of 2018.
InsiderScore director Ben Silverman said that U.S. companies have balanced sheets which are “generally strong” due to the tepid 2020 purchasebacks. He also predicted that repurchases will continue to rise from the second quarter.
He said, “The record was within reach.”
Howard Silverblatt, who also tracks stock buybacks as senior index analyst for S&P Dow Jones Indices, agrees.
I was told by him that right now buybacks have increased 11% over the previous quarter. That is close to a record.
The buyback market is booming. The financial sector is leading this buyback surge, working to return excess capital. Silverman points out that Bank of America purchased back $9.9billion, which is 28% more than the next largest buyback. American Express, Morgan Stanley and Morgan Stanley had their third-quarter largest buybacks ever. Each spent over $3 billion.
The technology sector is also big in buybacks. Facebook revealed that it purchased $14.4 billion worth of shares during the third quarter. This is a record quarterly purchase and nearly twice what it purchased in the second quarter.
Buybacks: The Problem
The following reasons will give more ammunition to critics of stock buybacks:
The share count does not decrease by buying back shares. One reason stock buybacks are a good option is because they can lower the outstanding shares of a company, which then increases earnings per share.
This is true but only if shares are actually reduced. Problem is, the companies can also float shares again, sometimes because employees are allowed stock options.
Sometimes the results are a wash. The total share count for the S&P 500 is slightly higher today than it was in 2018.
S&P 500: shares outstanding
2018 300 billion
2019 296 billion
2020 312 billion
2021 (YTD) 309 billion
Source: S&P Dow Jones Indices
Silverblatt noted that the share count increased despite $1.6 trillion being spent on buybacks between 2018 and 2018.
Stock options are a great way for corporate America to make a lot of money again. Silverblatt stated that because stock prices have risen so much, more employees will likely exercise their rights.
Silverblatt could not provide numbers for how much cash was being cashed in. However, he said that while the stock market has experienced a dramatic uptake in recent years, it means employees have stock options in the bank. Therefore, it is possible corporate executives may be cashing in these options.
Sens will be influenced by these developments. Brown and Wyden.
An excise tax on buybacks could reduce them. More than half — 55% — of US. CFOs say a tax on buybacks would lead their firms to repurchase fewer shares, according to a recent CNBC Global CFO Council Q4 2021 survey.
The tech trend of buybacks is largely one that involves buying back shares.
Wall Street has a lot of support for buybacks. They argue that repurchases make financial sense and are an efficient way to allocate cash flow.
Technology is the most concentrated area for buybacks. Nearly a third (or more) of all buybacks were accounted by five companies:
Here are the top 5 buybacks (second quarter)
Apple $26 billion
Alphabet $13 billion
Facebook $8.4 billion
Oracle $8 billion
Microsoft $7 billion
Source: S&P Dow Jones Indices
What is the reason buybacks are so concentrated within tech companies? Silverblatt stated that these are companies with cash flows. These companies are huge. Apple alone was responsible for 13% of all buybacks. They’re willing to spend the cash to buy back stocks.
Buybacks: Are you getting more bang for your bucks?
Wall Street believes that buybacks are not as detrimental to the bottom line, as the cash flowing into them may have been.
It’s partly because shares aren’t declining but there is another problem. Stock prices are higher than in 2018. This means that stock buybacks are buying fewer shares.
The S&P 500 is up 84% since the close of 2018, when buybacks reached their peak, at $223 billion.
Silverblatt explained that because stock prices are higher than in 2018, “that $223 million has not had an impact on earnings as much as 2018”.
He noted, for example that 21% of companies saw a minimum of 4% share reduction during the fourth quarter 2019.
Only 5% of companies saw a decrease in share count by 4% last quarter.
Silverblatt stated that to make a significant impact on your earnings, you will need to invest more.
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