Companies Use Tax Cut Savings to Buy Their Own Shares – The New York Times

Gee…I didn’t see this coming….    Companies Use Tax Cut Savings to Buy Their Own Shares

By MATT PHILLIPS

FEB. 26, 2018

 

President Trump promised that his tax cut would encourage companies to invest in factories, workers and wages, setting off a spending spree that would reinvigorate the American economy.

 

Companies have announced plans for some of those investments. But so far, companies are using much of the money for something with a more narrow benefit: buying their own shares.

 

Those so-called buybacks are good for shareholders, including the senior executives who tend to be big owners of their companies’ stock. A company purchasing its own shares is a time-tested way to bolster its stock price.

 

But the purchases can come at the expense of investments in things like hiring, research and development and building new plants — the sort of investments that directly help the overall economy. The buybacks are also most likely to worsen economic inequality because the benefits of stocks purchases flow disproportionately to the richest Americans.

 

The tax overhaul is the cornerstone of Mr. Trump’s economic plan. It has been a big win for companies, offering lower corporate rates and a permanent break on overseas profits. Warren E. Buffett said in his annual letter to investors on Saturday that his company, Berkshire Hathaway, enjoyed a $29 billion gain thanks to the new tax law.

 

What companies do with the trillions of dollars they’re bringing back to the United States, and the money they will save each year on their tax bills, will in large part determine whether the plan is a success or a failure.

 

As the tax cuts kick in, companies have laid out a variety of uses for the money. Some are paying out one-time bonuses to employees. Others are raising salaries. Others plan to open new factories.

 

In the fourth quarter, American companies’ investments in things like factories and business equipment grew by 6.8 percent. That was the fastest growth rate since 2014, but far from a giant the surge in capital spending that was promised ahead of the tax overhaul.

 

But the buying back shares is also at record levels.

 

Almost 100 American corporations have trumpeted such plans in the past month. American companies in the have announced more than $178 billion in planned buybacks — the largest amount unveiled in a single quarter, according to Birinyi Associates, a market research firm.

 

Such purchases reduce a company’s total number of outstanding shares, giving each remaining share a slightly bigger piece of the profit pie.

 

Cisco said this month that in response to the tax package, it would bring back to the United States $67 billion of overseas cash, using $25 billion to finance additional share repurchases. Alphabet, the parent company of Google, authorized up to $8.6 billion in stock purchases. PepsiCo announced a fresh $15 billion in planned buybacks. Chip gear maker Applied Materials disclosed plans for a $6 billion program to buy shares. Late last month, home improvement retailer Lowe’s unveiled plans for $5 billion in purchases.

 

On Monday, Mr. Buffett said on CNBC that Berkshire might be open to buy some of its shares. The remarks helped send Berkshire’s stock — and the broader market — higher.

 

More buybacks are almost certainly on the way. UBS analysts covering Apple said the iPhone maker might authorize another $30 billion in share purchases when it reports its next quarterly earnings in April. That would be on top of the $30 billion it already spends each year to buy back its shares.

 

“I’m expecting buybacks to get to a record for 2018,” said Howard Silverblatt, a senior index analyst with S.&P. Dow Jones Indices. “And if I’m disappointed, there’s a lot of people with me.”

Photo

Cisco said it may spend as much as $25 billion for additional share repurchases. Credit Sergio Perez/Reuters

 

The flurry of planned buybacks has been good for the stock market. Early this month, stocks were down more than 10 percent from their January peak. The prospect of companies flooding markets with “buy” orders helped the market recoup some of its losses.

 

The broader impact on the economy is less clear. Economists believe a rising stock market benefits the economy, helping support consumer and business confidence. But the vast majority of the billions of dollars in planned share purchases will benefit the richest 10 percent of American households, who own 84 percent of all stocks. The top 1 percent of households own about 40 percent of all stocks.

 

Ultimately, the effect of the rising stock market depends on how those wealthy investors use their windfall. It helps the economy more, for example, if they put the money toward a productive new companies than if they invest in government bonds.

 

Companies typically decide to make long-term investments in things like new workers and factories based on whether they will make the company more profitable — not merely because the companies are sitting on a pile of money that they otherwise would have paid in taxes.

 

At a news conference Thursday, the head of the White House’s Council of Economic Advisers, Kevin Hassett, acknowledged that many companies were spending their money on buying their own shares.

 

“Right now we’re going to have an adjustment where you see probably more dividends and share buybacks than wage increases,” Mr. Hassett said. “But going forward we’re going to see a lot of capital formation and wage growth.”

 

That is not what happened in 2005, when a one-time tax holiday allowed companies to repatriate money on the cheap. That plan, championed by President George W. Bush, was sold as a way to get American companies to invest more in the domestic economy.

 

Some $300 billion came back to the United States that year. But economists estimated that as much as 92 percent of it may have been paid out to companies’ shareholders — mostly in the form of buybacks.

 

Studies have shown that the tax change lifted companies’ stock prices but did not expand their American work forces.

 

Until the early 1980s, the practice of buying shares with corporate money was considered borderline illegal because it was thought to potentially open the company up to charges of manipulating share prices.

 

But in 1982 the Securities and Exchange Commission adopted a rule that gave the green light to most share repurchases, as long as they followed certain rules.

 

Historically, American companies had paid out profits with a quarterly check, known as a dividend. But after the S.E.C.’s rule change, companies started using more of their profits to buy their own shares, in the process giving their shareholders a bigger piece of the company.

 

Buybacks soon soared. By 2016, the most recent year for which there is complete data, companies spent $536 billion on purchasing their own shares, according to data from S. & P. Dow Jones Indices.

 

That was about 5 percent less than those companies spent on new plants, research and development and other investments. By contrast, 20 years ago, companies spent four times as much on such investments as they did on buybacks.

 

Some economists think the surge in share buybacks has something to do with the relative decline in capital investments, which recently have been lower than expected.

 

“We have some causal evidence that because of short-termism companies are doing some stock repurchases that maybe they shouldn’t do,” said Heitor Almeida, a professor of corporate finance at the University of Illinois at Urbana-Champaign. “And maybe that’s causing them to reduce investment.”

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Seniors and the generation wealth gap

This is a great analysis of the big and growing wealth gap between us Baby Boomers and our kids.

Author Tamsin McMahon attributes this generational wealth gap to a combination of “financial discipline, public policy and good timing”. 

  • “Good timing”?  Better to call it luck, as in winning the “ovarian lottery“.
  • “Public policy”? “Turnout among younger voters is notoriously low, so politicians naturally target their campaigns to the seniors who actually show up on election day.”
  • “Financial discipline”?  With good timing and public policy on our side, we Boomers didn’t need no stinkin’ financial discipline.  That was for our parents.

Seniors and the generation spending gap.

Housing Prices Will Be Set by the Most Foolhardy

In this column for Bloomberg View, Megan McArdle presents a variety of arguments in favor of (and against) the idea of forcing people to save for their retirement.  The most interesting aspect to me was the description of how the challenges of home ownership and raising a family make retirement savings increasingly difficult  “The conundrum for responsible parents who want to get their kids into a good school and also save 20 percent for retirement is that the prices will be set by the most foolhardy.”  Ouch.

Ever hear the advice to buy the worst house in the best neighborhood you can afford? I know a lot of 40-something parents who give (and practice) this advice. You get access to the best possible school districts by sacrificing something in the way of home amenities.

However, I hear a fair amount from parents who have tried this strategy and found that it’s not quite as cheap as they imagine. They carefully calculated their mortgage payment and how long they could live with the hideous ’80s black-and-white kitchen. They forgot to factor in the special property tax assessment because the school district is overcrowded and a new building needs to be built. Or what all the add-ons would do to their budget in a town where the average household income is at least $100,000 higher than theirs. All the kids’ friends are on travel teams that cost thousands of dollars a year. The French class wants to go to Paris instead of a local French restaurant. It is theoretically possible to say no, but doing so means that your kid will be sitting home playing video games while their friends are out developing essay-worthy skills. Then everyone’s friends are going away to small liberal arts colleges and can you really tell yours to live at home for two years and rack up credits at community college before transferring to State?

What’s easiest to shortchange? Not the house — you’re already in the cheapest house in town. Maybe the cars — defiantly drive that 1992 Toyota for another 10 years. That still leaves a lot of parents in the hole, and what they choose to cut back on is retirement. The conundrum for responsible parents who want to get their kids into a good school and also save 20 percent for retirement is that the prices will be set by the most foolhardy. If one parent is willing to zero out their retirement contributions, they will set the price for homes in good school districts, leaving other parents with the choice of either doing the same or consigning their children to a less desirable school

 

Are Global Cities Really Doomed to Become ‘Citadels’ for the Rich?

Very interesting review of a Financial Times opinion piece by Simon Kuper “Priced out of Paris“. and asserts that Paris is not alone – it’s a global phenomenon.  This isn’t news, but the analysis in the original article is interesting.

Reviewer Emily Badger points out, idealistically, that it doesn’t have to be this way.

Yes, the more desirable a place becomes, the more expensive it is to live there. But cities also become unaffordable when zoning regulation limits the supply of new housing, or caps the height of new construction. Cities become out of reach when no policies are in place to maintain affordable or mixed-income housing.

Kuper diagnosed the problem, but he didn’t identify the causes – or the slightly more optimistic view that if our intentional choices about how to design and govern cities make them unaffordable, we might also attempt to actively prevent that from happening.

Yeah, like that’s going to happen.

Are Global Cities Really Doomed to Become ‘Citadels’ for the Rich? – Emily Badger – The Atlantic Cities.