US corporate share repurchases keep setting new records, a trend some experts expect to persist despite bipartisan unease on Capitol Hill and a weaker economic outlook that could crimp profits.
Fueled with windfalls from the 2017 tax cut and cheap debt, companies in the S&P 500 spent $203.8 billion buying back their own stock in the third quarter, the third consecutive new record, according to S&P Dow Jones Indices.
Stock buybacks boost share prices and make profits look bigger by increasing earnings per share, a key Wall Street benchmark.
Boeing shares rose nearly four per cent on Tuesday after it announced it was boosting its share repurchase plan to $20 billion from $18 billion and increasing its dividend.
But those share repurchases are financed by funds that might otherwise go to hire workers or invest in new projects, which could create more jobs.
Critics include Republican Senator Marco Rubio, who plans to introduce tax legislation to discourage buybacks in favour of business investment that restores ‘the dignity of work.’
The proposal would allow firms to deduct the cost of a new factory, ‘but a company that wants to use its tax cuts to buy back its own stock wouldn’t get any additional tax benefit,’ Rubio wrote in The Atlantic magazine.
General Motors also drew the ire of lawmakers after it announced last month that it would shutter five North American factories and cut thousands of jobs while still buying shares.
Democratic senators Amy Klobuchar, Chris Van Hellen and Tammy Duckworth called on the automaker to suspend some $3.4 billion in share repurchases, saying ‘these buybacks give a windfall to GM’s executives and stockholders, while diverting cash flow that GM could use to invest in electric and autonomous vehicles without laying off American workers.’
Critics often blame the 2017 tax cut championed by president Donald Trump, which he billed as a tool to boost economic growth.
The vast majority of stock is owned by the wealthy, with some studies showing the top 10 per cent of Americans holding more than 90 per cent of the stock.
The value of buybacks is ‘extremely skewed towards the top,’ said Josh Bivens, research director of the Economic Policy Institute, a labour union-backed think tank.
Bivens views the buyback boom as a ‘symptom’ of the problem of ‘corporations not having good ideas about how to invest all the savings available to them.’
Bivens, who favours stronger public investment in education and infrastructure, is sceptical the talk on Capitol Hill will lead to concrete steps.
‘I have a hard time seeing particularly aggressive actions on (buybacks) anytime soon,’ Bivens told AFP, noting that ‘corporate executives tend to get their way on Capitol Hill.’
But business groups contest the notion that share buybacks only benefit ‘corporate bosses.’
‘A majority of all American families own stock, either directly or indirectly, through mutual funds, pension funds, and retirement accounts,’ Business Roundtable President Joshua Bolten said in a column.
‘Just as important, money returned to shareholders of any kind recirculates throughout the economy.’
Some market watchers think the buyback boom could ebb if the economy slows. On Tuesday, FedEx officials said they were weighing whether to purchase additional shares as they slashed their profit forecast due to weakness in China and Europe.
And Lowe’s saw its debt rating downgraded by S&P after a December 12 announcement of a new $10 billion share repurchase program, due to expectations of higher debt levels.
Frances Donald, head of macroeconomic strategy at Manulife Asset Management, said a pullback in buybacks could be a drag on stocks in 2019.
‘What do we do if these companies are no longer engaged in this activity?’ she said. ‘That could have implications.’
But Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, noted that a decline in stock prices permits companies to buy back shares more cheaply. He expects buybacks to remain high, even if not at record levels.
‘Once you give it, it’s hard to take it back,’ Silverblatt told AFP. ‘It’s gratification and support of your stock.’
DataTrek Research’s Nicholas Colas noted that buybacks plummeted in 2009 just after the financial crisis, but quickly recovered. Companies in 2010 allocated 43 per cent of their operating earnings to buybacks, and have averaged 51 per cent from 2010 to 2017.
Buybacks ‘won’t go away in a garden-variety recession,’ Colas said in a note last month.
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