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Buybacks Are Back, But New Taxes Could Dull the Party

Wall Street

As the US economy is improving from the pandemic, total U.S. corporate stock buybacks are on track to hit a record for the third quarter, and Wall Street is buzzing with reports on how important share buybacks and dividends are becoming once again. 

Against this backdrop, Wall Street isn’t even blinking at the Biden administration’s proposal to tax stock buybacks to help pay for a $1.75-trillion spending plan.

The proposal, called the Stock Buyback Accountability Act, will levy a tax on the amount spent by a publicly traded company on buying back its own stock. Initially, Senate Democrats had proposed a 2% buyback tax before agreeing to cut it in half. 

“Corporate executives too often use buybacks to enrich themselves rather than investing in workers and growing their businesses,” the White House said in a summary of the tax.

Stock buybacks are a common practice for rewarding shareholders and boosting earnings per share. Just in the last decade, the companies in the S&P 500 stock index have spent $5.3 trillion on buybacks.

A recent CNBC Global CFO Council poll of 20 U.S.-based CFOs had 55% of respondents saying the tax could lead them to lower their level of share repurchases. Others said that such a tax would have no impact on their buyback plans.

Again, Wall Street doesn’t seem to be bothered too much, and buybacks are piling up.  

S&P 500 companies are expected to repurchase a total of $224 billion in stock by the end of this quarter. That even beats the last record from Q4 2018 when companies engaged in $223 billion in buybacks.  

Back in 2018, companies were rolling in cash thanks to the Trump administration’s corporate tax cuts. For the full year of 2018, the largest U.S. companies spent $806 billion on stock buybacks, representing a 55% jump over 2017. 

But COVID-19 brought the largesse to an abrupt end. During the peak of the pandemic, in Q2 2020, stock buybacks bottomed. 

The recovery is now back on and analysts still expect companies to continue to spend high levels of cash well into 2022. 

Softbank, Berkshire Hathaway and Regeneron are just some of the most recent  companies to announce big buybacks this week. 

Tokyo-based Softbank saw its stock soar nearly 10% on November 8th after it announced an $8.8-billion buyback. Softbank has also been a big fan of buybacks to boost valuation. In 2020, this strategy tripled the company’s valuation, according to Bloomberg.  

Since mid-2018 Warren Buffett’s Berkshire Hathaway has ploughed over $50 billion into stock buybacks. This year alone has seen nearly $20 million in buybacks, Bloomberg reports.

Regeneron Pharmaceuticals Inc earlier this week authorized a share buyback program up to $3 billion based on balance sheet strength. 

According to S&P Dow Jones Indices, in the first six months of this year, S&P 500 firms repurchased $609 billion in stock. Under the buyback tax announced by the White House, they would owe $6.1 billion.

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