The estimate for Q2 is close to nearly $200 billion as well, though preliminary. 2018 is poised to be a banner year when it comes to share repurchases among large corporations.
What is a stock buyback? Simply put, it is when a publicly traded company uses cash to literally buy shares of itself that are owned by investors. It results in fewer shares outstanding, which helps concentrate share ownership and subsequently boost the share price.
Is this a good thing?
It is not good or bad. It just is.
What makes all this newsworthy is how it relates to the recent tax law changes that went into effect this year. The new laws give companies the ability to repatriate, meaning bring back, profits from overseas at a reduced tax rate compared to the previous 35% charge (which was reduced to 21% in the new bill as well). The new laws will only assess a 15% tax on repatriated liquid assets like cash and 8% on non-liquid assets like equipment.
The idea behind the Trump/GOP tax plan was that the reduced tax rate would entice big corporations to bring assets back to the U.S. and invest more domestically. Historically, large companies have been reluctant to bring home foreign profits due to the hefty 35% tax charge for doing so.
What does this have to do with stock buybacks?
Presumably, much of the cash being repatriated is being used for buybacks. I hesitate to say it is being used for buybacks “rather than investing in new U.S. operations” because it is way too early to make that distinction. But the clock is ticking.
President Trump has said that “trillions” (specifically $4 trillion as recently as August) in corporate funds would be brought back to the U.S. as the result of the tax law changes. According to the Wall Street Journal, only $143 billion has been repatriated so far in 2018. Those funds come from 108 publicly traded companies that comprise the bulk of the $2.7 trillion in overseas profits, although two companies — Cisco and Gilead Sciences — comprise a whopping two-thirds of the total amount. It is premature to draw too many conclusions because giants like Apple, which has pledged to bring back a large amount of capital, have yet to do so but very well could.
The elephant in the room is answering the question: Do companies have a responsibility for prioritizing investment over share buybacks with these repatriated funds? No, they do not. Of course there is so much lobbying that is done between powerful companies and powerful politicians that the idea of “owing” anyone anything is a bad rat hole to go down. So that aside, I would argue the companies are not under any obligation to use the funds in a particular way. If they choose to buy back shares of stock, so be it.
In The Market...
The S&P 500 gained +1.1% last week. Let's look under the hood: