U.S. President Joe Biden gestures as he speaks about the Inflation Reduction Act of 2022 at the White House in Washington, July 28, 2022.
Elizabeth Frantz | Reuters
New 1% excise tax on corporate stock buybacks – a late Presidential addition Joe Bidenscanning tax, health and climate packages – added a new revenue for controversial activity.
But there are mixed views on how it could affect investors.
The Inflation Reduction Act provision levies a 1% excise tax on the market value of net corporate shares repurchased beginning in 2023.
How stock buybacks work
When a public company has excess cash in its profits, it can buy shares of its own stock on the public market or make an offer to shareholders, known as a share buyback or buyback. share.
Amy Arnott, portfolio strategist at Morningstar, explains that it is a way of returning cash to shareholders and is more widely used than dividendpart of a company’s profits is regularly sent back to investors.
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If total shares fall, a share buyback can also increase earnings per share, a measure of a company’s financial performance.
However, critics argue that acquisitions are often accompanied by new issue of stock options for executives and other employees. Adding new shares may negate some or all of the stock reduction benefits for ordinary investors from the buyback.
‘Acquisition monster’ drives the trend
With low interest rates driving profits and value, S&P 500 companies repurchased $881.7 billion of their own shares in 2021, up from $519.8 billion in 2020, according to a report. S&P Global Data.
A significant percentage comes from a small number of so-called “bought monster”, with five companies – AppleGoogle’s Parents AlphabetFacebook parents Meta, Microsoft and Bank of America – accounted for a quarter of the dollar value of stock buybacks over the past year.
How the 1% tax on share buybacks could affect investors
While the full impact on the stock market is unknown, experts have mixed opinions on how provisioning can affect individual portfolios. .
“I don’t think it’s going to have a big impact on investors,” Arnott said. But at the profit level, cash-strapped companies may “tend to ‘pay a slightly higher dividend than stock buybacks,'” she said.
It is estimated that a 1% tax on share buybacks could trigger a 1.5% increase in the company’s dividend payout, according to the report. Tax Policy Center.
And a dividend increase can have an unexpected impact, depending on where investors are holding these assets, said Alex Durante, federal tax economist at the Tax Foundation.
“People with taxable accounts could be affected,” he said.
Of course, switching from buybacks to dividends could also change expected tax revenue, Durante added.
Provisions are expected to grow by about $74 billion over the next decade, according to recent estimates from the Joint Commission on Taxation.
However, since the new law won’t take effect until January 1, 2023, some experts predict companies will accelerate “tax-free” stock buybacks through 2022, especially with stock prices still far below their previous values.
Synthetic engine on Friday it was announced that it would be back up and boost share buyback to $5 billion, up from the previous $3.3 billion remaining from the program. And Home Depot on Thursday announced a $15 billion stock buyback program.
