Limiting buybacks, say supporters, could reduce the liquidity in stock markets and hurt share prices. US President Joe Biden has called for a quadrupling of the tax on buybacks.Ĭorporations counter that they use repurchases as a way to efficiently distribute excess capital. Preventing companies from repurchasing their own shares, they argue, would free corporate cash to invest in growth and raise wages instead. Why it matters: Buybacks, say critics, are a tool that allow ultra-wealthy executives to manipulate markets while funneling corporate profits into their own pockets instead of the economy. Buybacks have almost tripled in value since 2012 (+182%), according to recent data from Janus Henderson. The rapid growth in buybacks is not a one-year phenomenon, either. The S&P 500 is up more than 14% so far this year. If companies believed that there was a price mismatch in their stock value and their actual value, they would prioritize buying back shares of their own stock at a discount, he said.īuyback announcements reached a new record of $1.22 trillion last year, and they’re on track to beat that high in 2023, according to Bank of America analysts. Last year was a remarkably bad year for markets, with the S&P 500 dropping nearly 20%. “One would argue that in a higher rate environment, it’s more beneficial to keep cash on the balance sheet … because you can generate a decent return on your cash rather than burning a hole that will require you to go out and borrow money at higher rates,” El Nems told Before the Bell. Now that it’s more expensive to borrow, companies in the US should reconsider the amount of money they’re spending on buybacks, he added. “When companies could essentially access finance at almost zero cost, there was a huge incentive to issue debt and buy back shares as this added immense value,” he said. “The global cost of capital is now significantly higher than in the last few years,” said Ben Lofthouse, head of global equity income at Janus Henderson. Recent turmoil in the mid-sized banking sector only exacerbated those problems. High borrowing costs because of interest rate hikes by the Federal Reserve and an uncertain economic outlook mean that credit is getting more expensive and harder to find. Profit pressures on corporate borrowers are intensifying at a rapid pace as business costs remain elevated while consumer demand wanes amid the prospects of an economic downturn. In fact, the tech sector accounted for the highest amount of cash held with 34% last year, but also the highest percentage of debt outstanding, with 12%, according to Moody’s. There was also a noteworthy 18% increase in capital expenditures - long-term investment in business growth.īut debt was flat year over year, meaning that companies didn’t use much of their cash reserves to pay down outstanding loans. The cash went toward rewarding investors: Share buybacks rose 31% and dividend payments were up 10% last year, found Emile El Nems, vice president for Moody’s Investors Service. What’s happening: A new report from Moody’s Investors Service finds that nonfinancial companies’ corporate cash declined 12% last year to $2 trillion. The largest companies in the S&P 500 still have a decent stockpile of currency, but the decision to reward investors instead of paying down debt could mean corporations are overly focused on short-term stock gains. While shareholders may be chuffed by that news, the slumping economy, surging interest rates and a credit crunch may mean US firms come to regret reducing their cash buffers. Companies are sitting on a lot less cash than they were last year, largely because they’re spending it on share buybacks and corporate dividends.
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