Record stock buybacks—driven in part by the corporate tax changes in the Tax Cuts and Jobs Act (TCJA)—have sparked a media and political furor. Unfortunately, they’ve also created a great deal of confusion. To help elevate the debate, here are three things you should know.
1. Repatriated overseas profits are the main way TCJA is boosting buybacks
By slashing corporate taxes, TCJA will boost after-tax profits and cash flow. Companies will use some of that cash to buy back shares. But that is not the main way TCJA is fueling today’s record buybacks.
The big reason is the “liberation” of around $3 trillion in overseas profits. Our old system taxed the earnings of foreign affiliates only when the domestic parent company made use of them. To avoid that tax, many companies left those earnings in their affiliates. They could reinvest them in their foreign operations or hold them in U.S. financial institutions and securities, but they couldn’t use them for dividends to parent company shareholders or stock buybacks.
By imposing a one-time tax on those accumulated profits, the TCJA freed companies to use the money wherever they wanted, including in the United States. And multinational firms are leaping at the chance. Cisco, for example, says they are repatriating $67 billion and buying back more than $25 billion in stock.
Cisco’s response reflects a broader trend. Repatriated profits will account for two-thirds of this year’s increase in stock buybacks, according to JP Morgan. Stronger earnings, due to both improved before-tax profits and lower taxes, make up only one-third.
2. Buybacks do not mechanically increase stock prices
Buybacks can help shareholders. But it’s not as simple as much commentary suggests. Continue reading “Three Things You Should Know about the Buyback Furor”