Biden targets stock buybacks – do they help you as an investor?

There seem to be two camps when it comes to stock buybacks. On the one hand, a share buyback can reduce a company’s stock count, help increase earnings per share, and hopefully support a higher share price; on the other hand, some money spent on an acquisition can benefit shareholders more if it is used to expand or improve the company’s operations.

President Joe Biden appears to be on the second side and is targeting stock buybacks after companies poured billions of dollars into the practice during a period of high inflation over the past two years and simultaneously laid off employees. multiply this year. Biden supports a 1% tax on dollars spent on buybacks, which are part of the Inflation Reduction Act signed into law in August.

After the tax change, Chevron Corp.

announced a $75 billion acquisition, and Facebook’s parent company, Meta Platforms Inc.

following layoffs with $40 billion buyback authorizations this earnings season.

Biden will propose raising taxes to 4% in his State of the Union address to Congress on Tuesday night. As he made the final edits to his annual keynote, a first-hand example of the potential negative impact of stock buybacks is happening in real time. Bath Beds and Beyond Inc.

spent $230 million on stock buybacks in the fourth quarter of fiscal 2021, ending February 26, 2022, even as the company’s sales fell 25% from a year earlier, and The company posted a net loss of $159 million that quarter. Less than a year later, the company threatened with bankruptcy and could be forced to sell convertible shares in Hail Mary’s attempt to stay afloat.

Bed Bath & Beyond can be an extreme example of wasting money on an acquisition. Often the arguments for or against an acquisition are more nuanced.

For why Biden is so focused on acquisitions, check out these numbers for the five core Big Tech companies — most of which the Biden administration has targeted antitrust actions. rights — in the amount in billions of dollars, as of the end of their most recent reported fiscal quarter:



Billions of dollars spent on acquisitions in the last 12 months

Change the amount of shares

Billions of dollars spent on R&D in the past 12 months

Total number of authorized buybacks

Apple Inc.






Microsoft Corporation





$60 Inc.






Alphabet Inc. Class A






Meta Platforms Inc. Grade A










Source: FactSet

All five companies have managed to reduce their stock counts from a year earlier, when they spent a total of $210 billion on buybacks. At the same time, their stock-based compensation — in stock or stock options — totaled $69.3 billion, according to FactSet.

On an annualized basis, a 1% federal tax on five-company acquisitions would amount to $2.1 billion — barely enough to change capital allocation decisions. And Biden is unlikely to get his proposed 4% tax rate with a Republican majority in the House.

In the far right column, you can see the total number of buyback programs authorized by the five companies’ boards, as compiled by FactSet: A staggering $665 billion.

Comparing the amount spent on acquisitions with the amount spent on research and development for the past four reported quarters, we find that acquisition amounts are higher for three out of five companies, with Amazon. com Inc.

and Meta is the exception.

In the case of Apple Inc.
the amount spent on share buybacks is more than three times the amount spent on R&D. Apple, on the other hand, posted a profit of $30 billion in its most recent fiscal quarter and a profit of $95.2 billion for the past four reported quarters. And it’s hard to argue that Apple hasn’t spent enough on R&D.

Think about the number of shares

If you hold stock in a company, and then the company issues more shares, your ownership percentage will be diluted. A company may issue shares to raise the working capital needed for expansion or acquisition. If the company issues shares to finance a buyback, the hope is that earnings per share will increase despite the dilution and you can ultimately believe it’s worth it.

But what about stock-based compensation? When the board of directors distributes new shares to the chief executive officer, the number of shares is also diluted. Non-employee shareholders may not be happy with this, and a share buyback could ease the dilution. But companies often spend enough on buybacks that the total number of shares falls, despite stock-based compensation. That’s what happened to the big Tech companies listed above.

But if you hold individual stocks, you should keep an eye on the number of shares. You can see this every quarter in the company’s earnings press release, on the income statement, just below earnings per share. If the number of shares increases, it may reflect the issuance of shares to finance the buyback. But this is not always true.

Oracle Corporation

the average number of diluted shares used to calculate earnings per share for the second quarter of fiscal year 2023 ended November 30, up 1.9% from a year earlier, although The company has spent $3.3 billion on acquisitions over the past four quarters. During the same period, total stock-based compensation was $3 billion.

During Oracle’s third-quarter earnings call, CEO Safra Catz said the company is “committed to returning value to our shareholders through technical innovation, strategic acquisitions, share buybacks, and share buybacks.” , prudent use of debt and dividends.” While the number of shares has increased in the most recent quarter, it’s fair to look back. A year earlier (that is, in a quarterly press release sent on December 9, 2021), Oracle’s stock count had dropped 12% year over year.

You should track the company’s stock count, buybacks, and stock-based compensation over time.

Is a buyback really a ‘payback’ for shareholders?

The answer is no – despite the Biden administration said on February 6 that share buybacks “enable corporations to pass on tax-advantaged payments to wealthy and foreign investors.”

A share buyback is not a direct transfer of money to shareholders. Acquisitions are typically made on the open market and sometimes at historically high prices relative to earnings. Those purchases don’t automatically help investors keep holding the stock.

Some money managers will argue that buybacks are a more efficient way to allocate excess capital than paying dividends because dividends are subject to income tax. Then again, there are tax incentives for most corporate dividend payments. And shareholders receive income directly or are free to reinvest.

There is never any guarantee that significant buybacks and reductions in the number of shares will lead to an increase in stock prices.

A classic example provided by International Business Machines Inc.
The company halted share buybacks in 2019 when it acquired Red Hat. But in the 10 years to 2018, IBM bought back $94.4 billion worth of stock. Shares were down 35% through the end of 2018 compared to the end of 2008, according to FactSet.

During that 10-year period, IBM’s stock price rose 35%, while the S&P 500

178% increase. With dividend reinvestment, IBM stock had a total return of 76% in the 10 years to 2018, compared with a 243% return for the S&P 500.

IBM’s 2018 annual revenue was down 23% from 2008. It doesn’t seem like the acquisitions are worth it. From the drop in sales, it seems that the company’s management felt that they had nothing better to do with the money during that time.

The Red Hat acquisition and repurchase suspension since then, along with continued dividend increases, has produced an important strategic shift. IBM’s 2022 sales were up 6% from a year earlier.

Since the end of 2018, shares of IBM are up 25%, while the S&P 500 is up 64%. With dividends reinvested, IBM returned 53%, while the S&P 500 returned 76%. IBM stock currently has a dividend yield of 4.85%. It has underperformed the S&P 500 since late 2018, but to a much lesser extent than it has trailed the index over the course of 10 years with $94.4 billion in buybacks through 2018.

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