Stock buybacks have increasingly been in the news since the passage of the new tax law. But what are they?
A stock buyback is a tool used by corporations to deliver a benefit – akin to a bonus – to their major shareholders and, often, to their top executives. A stock buyback – also called a stock repurchase – is exactly what it sounds like: it’s when a publicly traded company takes some of the cash they have and spends it on buying their own stock. The purchase of shares of a company’s own stock in turn boosts the value of the remaining shares on the market. It also boosts the worth of the major shareholders’ portfolio because there are fewer shares available, making each share an individual investor owns a bigger relative share of the company. It also has the effect of increasing the overall earnings per share. This ratio of total company earnings divided by total number of shares is often used as a key metric for determining executive compensation. By increasing the earnings per share, a buyback often helps executives boost their own pay.
How are buybacks connected to the tax law?
While there is no specific provision in the tax law incentivizing companies to buy their own stock shares, the tax law does offer companies an influx of cash. Because the tax law offers corporations a 40 percent tax rate reduction, many big corporations will see millions of dollars in tax savings.
Companies have the option of taking those savings and investing them back into the company – either by building new factories, updating equipment, offering their employees wage increases, or hiring additional workers. Or, they can reward their shareholders by boosting their stock prices. That means that a company that chooses to spend its new cash on stock buybacks will not be spending that money investing in the expansion of the company.
Some Wall Street analysts estimate that companies will spend $800 billion in 2018 on stock buybacks, with nearly half of those purchases funded by the cash influx from the new tax law. That amount is 51 percent more than companies spent on buybacks in 2017.
Do the buybacks help individual taxpayers?
In the short term, if you own stock in a company that engages in buybacks, you will benefit, because the value of the stock you own will rise. However, stock ownership is highly concentrated among high-income earners. The top 1 percent of earners own over 40 percent of all stocks – and the top 10 percent of earners own 83 percent of all stocks. So, if you are one of the 51 percent of the population that does not own any stock, these buybacks will not help you.