Dive Brief:
- Buybacks of U.S. stocks are on track this year to hit a record of about $1 trillion, Goldman Sachs said, as the imposition of a 1% excise tax on share repurchases approaches at year-end.
- “It has been somewhat surprising through the most recent reporting period that U.S. earnings have held up so well,” according to Neil Kearns, head of the corporate trading desk at Goldman Sachs. “When you look at excess cash on balance sheets, it’s still close to historic highs and absent alternative uses of that cash, investors are going to continue to demand that is returned to them.”
- Amid turbulent equity markets, the increase of corporate repurchases beyond the $992 billion record in 2021 highlights the good financial health of U.S. companies, Kearns said.
Dive Insight:
Beginning in 2023, a publicly traded company will need to pay a 1% excise tax on stock buybacks totaling more than $1 million in a tax year. The levy is a provision of the Inflation Reduction Act signed into law by President Joe Biden in August.
By repurchasing stock, companies can show strength during times of market weakness, Kearns said in a statement. Major U.S. stock indexes have plunged in 2022, with the Standard & Poor’s 500 Index falling about 12% as of Friday.
Stock buybacks — an alternative to dividends — remove shares from the market and enable a company to increase its share price and earnings per share and offset dilution when executives exercise stock options.
A company that repurchases stock can avoid paying the 1% excise tax if it pledges, in a single year, to fund at the same value an employee stock ownership plan, pension plan or similar arrangement.
Buybacks have drawn fire from lawmakers who say the strategy enriches shareholders and executives while failing to improve the quality of businesses or their goods and services.
Sen. Elizabeth Warren, a Massachusetts Democrat, called on the Commerce Department in September to strengthen safeguards preventing companies from channeling $52 billion in recently passed federal support for semiconductor companies toward stock buybacks.
Warren said that from 2011 until 2020, five of the biggest semiconductor producers — Intel, IBM, Qualcomm, Texas Instruments and Broadcom — spent $250 billion or 70% of their collective net income on stock buybacks.
“Stock buybacks mainly serve to manipulate share prices and boost corporate executives’ profits, money that could instead be used to build a factory, or hire workers, or invest in worker training,” Warren said during a Sept. 29 Senate Banking Committee hearing.
