- Companies brought $300 billion in cash back to the U.S. in the first quarter of 2018, according to the Federal Reserve.
- Top companies used $55 billion of that repatriated money to buy back stocks, resulting in a boost for shareholders.
- The influx of cash is a result of tax incentives in President Trump’s Tax Cuts and Jobs Act.
A new report from the Federal Reserve has revealed that the Tax Cuts and Jobs Act has resulted in a huge uptick in companies moving money previously held overseas back to the U.S., which has in turn translated into an enormous increase in the value of share buybacks — when a company purchases its own shares off the open market — in the first quarter of 2018.
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All told, companies repatriated some $300 billion of the approximately $1 trillion held overseas in the first three months of 2018, more than six times the last quarter of 2017, to take advantage of the new lower corporate tax rate and the new system for taxing profits earned overseas. And, based on the actions of the 15 firms with the most cash stored overseas in that same period, they’re spending a lot of that money on buying back shares.
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What Is a Stock Buyback and Why Do Companies Buy Their Own Shares?
Share buybacks are a popular way for profitable companies to return cash to their shareholders — the people who actually own the company. The benefits are simple: When a company uses cash to purchase its own shares on the open market, they’re boosting the value of the stock through basic supply and demand.
They increase the demand by putting in all the necessary purchase orders, which will naturally increase the price. What’s more, in taking control of those shares, they also decrease the total supply of shares available to the public market, thereby also increasing share price.
And finally, with fewer shares, the quarterly figures on how much profit the company earned per share of stock — also called earnings per share, one of the key figures that investors and analysts look at — look better due to there being fewer shares to spread out over the same earnings.
The more traditional method of returning cash to shareholders has been to offer or increase the company’s dividend, basically paying the cash directly to shareholders. Although this is more direct, those dividends are taxable, whereas the returns from a share buyback aren’t taxable until the person holding the shares sells them and has to pay capital gains taxes.
What Does This Big Buyback Increase Mean for Investors?
The short-term effect for investors should be generally very positive. In fact, looking back to the start of 2018, the huge increase in share buybacks could be part of the explanation for the roaring start to the year for the stock markets.
The long-term effects are harder to gauge. The most efficient way to reward shareholders is never entirely clear. It’s possible that reinvesting the same money into a company’s core business would generate higher earnings and better returns, but it’s also just as possible that such efforts would fall short and won’t create as much value as buybacks or dividends would have.
For now, however, one of the major goals of the Tax Cuts and Jobs Act — promoting the repatriation of the enormous pile of cash that many companies had left sitting overseas to avoid taxes — would appear to have been accomplished.
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