What the Inflation Reduction Act means for stock repurchases and the buyback 'monsters'

Published Mon, Aug 8 202211:07 AM EDT

The 1% excise tax on buybacks that is part of the Inflation Reduction Act is getting considerable attention Monday. In a note to clients, Goldman Sachs' David Kostin estimated the proposed 1% excise tax on buybacks would reduce earnings per share by about 0.5%. That is not a big hit, but it's reasonable to ask if this would change the behavior of those corporations that spend a significant amount of money buying back their shares. "I do not see the 1% tax inhibiting corporate buybacks, or dividends due to the additional 1% cost of buybacks," Howard Silverblatt at S & P Dow Jones Indices told me. "The 1% tax will likely cause some companies to rethink how to best return excess cash to shareholders but overall we don't expect it to have a huge impact on long-term buyback behavior," VerityData director of research Ben Silverman told me. The key phase is "long-term behavior." In the near term, this may push buybacks even further into record territory. "In the near-term, because the tax wouldn't kick-in until Jan. 1, 2023, there could be a substantial increase in buyback activity from now through the end of the year as companies try to get in some last-minute 'tax-free' buybacks," he said. A very small number of companies account for most of the buybacks, and the ocean of profits generated in 2021 has led to a large increase in corporate buybacks. In the last 12 months ending in June, corporate buybacks have been strong, nearing a record $1 trillion, according to S & P Global. This is almost twice the $547 billion corporations returned to shareholders as dividends in the last 12 months. However, most of the activity is concentrated in a small group of "buyback monsters." For example, five companies account for about a quarter of the dollar value of all stock bought back in the last 12 months. Sixteen companies account for about 40% of all buybacks. Top 5 'buyback monsters' (largest total buybacks, last 12 months) Apple: $91.3 billion Alphabet: $54.5 billion Meta: $53.2 billion Microsoft: $32.7 billion Bank of America: $21.0 billion Source: S & P Global Will corporations shift to returning more money in the form of dividends? Seems unlikely. Corporations have been favoring returning money to shareholders via buybacks over dividends for several years. The main reason: Buybacks are more flexible. In a pinch, corporations can simply stop the buyback program. If they raise dividends and then reduce the dividend, shareholders who have grown accustomed to the higher dividends will complain. That attitude is unlikely to change, Silverman told me, noting that any shift to dividends over buybacks would create a delicate "balancing act." "Investors get spooked when dividends are cut or are not increased as expected," he told me. "There's less attention paid to buybacks and many companies shift their quarterly buyback spend in a way that wouldn't be tolerated with dividends. So for companies that shift more cash to dividends they're going to need to be careful about how aggressive they are in doing so."