We have been hearing a lot about the increase of stock buybacks tied to the corporate tax cuts of December 2017. Both Republicans and Democrats in Congress are introducing plans to get rid of these “evil” and “wasteful” stock buybacks. The two sides are jostling for position and making sure to never let facts get in the way of grandstanding.
Well, here are the facts. Stock buybacks have surged to record levels (as shown in the chart above). Dividends have continued in a normal upward trajectory. This may look damning, but the truth is that average capital expenditures (often abbreviated as CapEx) are also up 10% for the S&P 500 over one year ago. This is good, as it means that companies are using some of the cash freed up from the 2017 tax cuts for spending on growth and investment.
Stock buybacks are preferred in the tax code as they are taxed at capital gains rates instead of ordinary income rates. If companies do not have a project to invest in that will make money in the future, then excess capital should be returned to shareholders. It should be returned in a efficient manner. Then those shareholders should go and invest that money somewhere else, efficiently.
As an update, two weeks ago we mentioned that the stock market was very forgiving to companies announcing negative surprises in earnings per share (EPS) for the last quarter of 2018. Now, with 80% of the S&P 500 reporting as of 2/15/2019, the change in share price for disappointing data still remains historically small, as the chart below illustrates.