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How Are Corporations Using Their Tax Savings?

NYSE

Money saved from taxes this year is going to share buybacks, with J.P. Morgan expecting companies to spend up to $800 billion on their own stock in 2018, and Democrats on the warpath over tax reform promises of new jobs.

GOP reforms cut the corporate tax rate from 35 percent to 21 percent and allowed companies to repatriate money held overseas at reduced rates, but the biggest result so far has been an explosion in buybacks for February.

Prior to the reform, buybacks had been on the decline. Last year, S&P buybacks reached only $530 billion. For the 12-month period ending September 2017, buybacks were at $517.7 billion—a 5.3 percent drop from the same period the year before.   

It wasn’t until July 2017, when the prospect of tax reform became visible, that buybacks started to gain traction again, recording five straight months of increase.

Since the beginning of 2018, according to J.P. Morgan, companies have announced $151 billion in buybacks, and we’re only two months into the year.

And the market sell-off we’ve seen recently could spur more buybacks, say analysts. Now we’re now looking at a potential $800 billion this year. Related: Can A Trade War Lift Gold Prices?

Kiplinger puts buybacks between 1 January and 20 February of this year at $173 billion.

Among others, the S&P 500 companies going on a share buyback spree so far include:

Cisco is planning to repatriate $67 billion in cash from overseas and buy back $25 million of its shares;

• Alphabet, the parent company of Google, is eyeing an $8.6-billion buyback;

• PepsiCo is planning to repurchase $15 billion of its shares;

• Applied Materials chipmaker is gunning for a $6-billion buyback program;

• Lowes home improvement retailer is planning a $5-billion buyback;

Mondelez International (think Oreo, Cadbury, Chips Ahoy) has committed to $6 billion in buybacks;

• Ebay has also committed $6 billion;

• Visa is eyeing a $7.5-billion buyback;

• Amgen (biopharma) has a $10-billion buyback commitment;

• Drugmaker Abbvie is also shooting for $10 billion;

• Wells Fargo has a $22.6-billion commitment.

Shareholders should be pleased because this usually leads to a boost in stock prices.

When Warren Buffett announced in late February that he would simply consider buying back some of Berkshire Hathaway’s shares, the stock edged higher.

But the critics aren’t having it. The buyback spree, they say, is anathema to the “Make America Great Again” mantra. Money saved in tax cuts should be going to new factories, new jobs, and higher wages—not to the elite at the top of the pyramid.

And Trump had indeed promised that the tax cuts would do just that: prompt companies to invest more in factories, workers and wages. That, in turn, would increase consumer spending and boost the economy.

Last month, Senate Minority Leader Charles Schumer (D-N.Y.) said buybacks inflate the value of a stock. “It benefits corporate executives who are compensated with corporate stock, not workers who are paid by wages and benefits,” he said.

The Harvard Business review blames widening economic inequality almost entirely on stock buybacks. HBR notes that the 449 companies in the S&P 500 index publicly listed from 2003 through 2012 used 54 percent of their earnings ($2.4 trillion) to buy back their own stock. Another 37 percent of earnings was taken up by dividends. “That left very little for investments in productive capabilities or higher incomes for employees.”

Related: The Fascinating Interplay Between Gold And The U.S. Dollar

The flip side of the argument is that buybacks are a positive for the economy, and proof that tax reforms are working. In fact, many economists argue that labor bears the brunt of the corporate tax itself; so regardless of buybacks, labor should benefit from the reforms.

But much of the partisan optimism on this side of the divide concerns the money repatriated from overseas.

“To the extent that there are share buybacks, that’s capital that’s recycled back into the economy… It doesn’t sit in banks,” Treasury Secretary Steven Mnuchin said. 

By David Craggen for Safehaven.com

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