Stock buyback programs surge in popularity in 2024, despite 1% tax

By Joy Wiltermuth

Buybacks are popular in a hot stock market as concerns about a potential increase to the 1% buyback tax heat up

Companies have been feverishly announcing plans to buy back their own stock this year, despite the S&P 500's 20% surge to record highs and the 1% tax in place on share repurchases.

Announced buyback plans already topped $1 billion since January, and could eclipse the previously record of $1.2 billion set in 2022.

Winston Chua, an analyst for EPFR's liquidity offerings, said he expects to see a new record for buyback plans to be reached in October or by the end of November.

Corporate executives typically receive stock-based compensation, which means top brass have incentive to drive share prices higher through repurchases.

Market conditions also look favorable for stocks, especially in the wake of the Federal Reserve's first rate cut in four years. Fed Chair Jerome Powell on Monday said the economy remains in good shape, and the central bank wants to avoid damaging the labor market.

"It's a little bit of a surprise," said Jeff Buchbinder, chief equity strategist for LPL Financial, of the high volume of buyback announcements despite the 1% tax in place for almost two years and because many companies only recently returned to profit growth.

"But on the other side, company balance sheets are in great shape," he said.

Investors who own an existing stock tend to like shareholder-friendly activities like buybacks and dividends because they can boost the value of their shares. Others say buybacks mostly enrich affluent shareholders.

Companies soon head into the typical "blackout period," where insider executives can't trade a company's stock ahead of earnings, but more details should emerge on planned buybacks as third-quarter results kick off later in October.

A bigger than 1% tax?

Democrats heading into their national convention in Chicago in August said they wanted to increase the tax on stock buybacks to 4%, to "discourage stock buybacks that benefit executives and wealthy shareholders, instead of workers and consumers."

President Joe Biden implemented the 1% tax on buybacks in 2023, and has proposed quadrupling it.

Stock buybacks surged after the Trump administration cut the U.S. corporate tax rate to 21% from 35% in 2017, logging only a brief retreat during the early part of the pandemic.

"Companies like to send the signal they believe their stock is undervalued," Buchbinder said. "You see them in challenging markets, but in a healthier market you end up seeming them more broadly during those times."

Buybacks, unlike a dividends, also tend to be viewed as a flexible option for a company to ramp up or down.

"When stock prices go up, the amounts go up," Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told MarketWatch.

When looking only at S&P 500 index SPX companies, his team tracked a collective $795.1 billion in spending on stock buybacks last year, down from $922.7 billion in 2022.

Like with inflation and grocery prices, when a stock price keeps hitting fresh highs, that means companies can afford to buy fewer shares of their own stock back, Silverblatt said.

With that backdrop, Silverblatt said he expects the volume of actual buybacks to be lower than the announced levels. EPFR said its historical data does not credit companies for buybacks that were authorized but not fully completed.

Why buybacks now?

Silverblatt said companies may be looking to get ahead of any increases next year to the 1% buyback tax, given the desire for both parties to generate income for the government.

He said it could take a 2%-2.5% tax rate to notably weigh on buyback volumes in the future.

Buchbinder at LPL said he views a 4% tax increase as unlikely to pass Congress, but that if it did the scales would tip in favor of offering investors dividends.

Stocks offering "shareholder yields," a metric that includes dividends, buybacks and debt reduction, already have been outperforming this year, he said.

They also will look even more attractive to investors in the months ahead, he said, if volatility picks up or the economy shows signs of slowing.

The following have been some of the notable buyback announcements so far in 2024:

Apple Inc. AAPL in May announced a record $110 billion stock repurchase program. Microsoft Inc. MSFT in September rolled out a $60 billion buyback plan.Alphabet Inc. GOOG GOOGL in April said it would repurchase $70 billion in its stock.Nvidia Corp. NVDA in August and Meta Platforms Inc. META in February both detailed $50 billion buyback plans.

The Dow Jones Industrial Average DJIA and the S&P 500 SPX both scored record closes on Monday, while the Nasdaq Composite Index COMP finished only 2.5% away from its prior peak set in July, according to Dow Jones Market Data.

-Joy Wiltermuth

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

10-01-24 0715ET

Copyright (c) 2024 Dow Jones & Company, Inc.