Apple announced earlier this week that they spent $22.8 billion (YES, BILLION!) last quarter on buying back their own shares, and that an additional $100 billion was earmarked for the same.
Who benefits from that? Shareholders.
- Cisco announced $25 billion in buybacks
- Wells Fargo $22 billion
- Pepsi $15 billion,
- Google $8.6 billion.
This list goes on and on. In February, Goldman Sachs estimated some $1.2 TRILLION will be returned to shareholders via buybacks and dividends in 2018 alone. Buybacks are estimated to reach $650 billion this year, up 23% from 2017. Some have those estimates even higher.
Companies have been buying back their own shares since the practice was legalized in the early 80’s, but this year might be one for the record books.
Why is this happening?
You can thank the new Trump tax plan first and foremost.
This isn’t about politics
I’m not here to give my opinion on the bill, this isn’t a blog about politics. I’m sure you can get plenty of that banter from your Facebook feed if you’re so inclined.
I also believe that politics has no place in investing.
What is important, however, is policy. There’s a difference.
It’s important to understand how policy affects your life and your investments, and how to best take advantage. Your opinions on policy matters is irrelevant to how they actually impact your life.
The Trump tax bill
In case you were sleeping under a rock earlier this year, Congress passed a new tax plan aimed at reducing taxes across the board. It was the largest tax overhaul in decades.
One of the major highlights of the bill is the permanent reduction of the corporate tax rate from 35% to 21%. It’s not an automatic 14% increase to every company’s bottom line due to deductions and all that fun stuff, but you can rest assured almost every legal corporation is being helped by this plan.
Yes, the common man had their rate reduced as well, but those benefits vary greatly across income brackets and other circumstances. Some will pay less in taxes, and it’s possible that some will actually pay more.
There’s money for everyone here
Again, I’m not here to debate the merits of the bill. It’s been passed by both chambers of Congress, signed by the President and is now the law of the land. Love it or hate it, your opinion won’t matter when you file next April.
Early on, it seems pretty clear as to how these companies are using their new found savings.
Many companies announced bonuses to employees earlier this year, several of whom credited the passing of the tax bill as the reason behind them. According to Trump’s own web site, over 300 firms have given bonuses up to $3,000 per employee, going to over 3 million employees (most seemed to be in the $1,000 range).
Even if 3 million employees received $3,000 each, that’s a paltry $9 billion dollars.
Apple alone is spending over $122 billion on share buybacks.
Think about that for a second.
No doubt those 3 million people receiving bonuses enjoyed the extra money (even if a $1,000 bonus turned into only a $750 bonus after taxes), but those aren’t the people #winning here.
Want to take advantage of the new tax plan? Either work at a company who gave you a bonus, or own part of a corporation.
Get a bigger piece of the pie
I for one would love if my boss gave me a $1,000 bonus. I wouldn’t care what justification they used in order to do so. But I want more.
I want a bigger piece of the pie.
In today’s world, anyone with a few dollars and a computer can buy stock in publicly traded companies. Open an account with Robinhood and buy one share of Apple with no commission or trading fee.
You can also buy shares in a myriad of other companies who are paying ever-increasing dividends and buying back their own shares.
Either sit around and complain about the tax plan, and how corporations are the ones coming out ahead, or buy a piece of these companies and get in on the action for yourself (of course, if you’re really good, you can get in on the action and still complain; it’s the American way).
The choice is yours.
(Disclaimer: You can’t willy-nilly buy shares in any company. I’m not here to tell you what to buy. There are plenty of other folks who can help guide you, but I’m not one of them. They, and I, will always reiterate to do your own due diligence. I do own Apple, that I purchased some time ago. You have to decide for yourself if now is the right time to buy.)
How do buybacks benefit shareholders?
Stock prices are based on simple supply and demand economics.
- More people buying = price goes up
- More people selling = price goes down
Anyone buying or selling has some reason to do so, and a desired price for the transaction. We all evaluate companies differently. What may seem like a bargain to me, may seem overpriced to you.
Share buybacks generally help drive the stock price up for two reasons:
- You have an eager buyer, willing to purchase large quantities of shares, with minimal regard to price.
- When companies buy back shares, it reduces the number of outstanding shares available.
In basic terms, you’ve increased the demand while decreasing the supply. All things equal, this will likely, eventually, result in an increase in share price. Share buybacks are a good thing for current shareholders.
We’re seeing how the current change in policy is playing out. Only time will tell if this is good for the economy, and the country as a whole long-term. If you don’t want to be left out, you should own shares in companies who are benefiting from the new law. This will ultimately benefit you as well.