New Taxation on Corporate Buybacks

September 20, 2022
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On 8/16/2022 President Biden signed the Inflation Reduction Act into law which encompassed a wide range of topics that arise during client conversations.  We plan to touch briefly on various aspects of this large fiscal package because these changes will impact clients directly and indirectly. 

One such example of a direct financial impact are the tax credits on electric vehicles (EVs).  There are several Indirect impacts to portfolios via new tax policies on corporations.  Today we discuss the 1% surcharge on corporate buy backs.  

1% Buyback Surcharge

A provision in the new legislation includes a 1% Buyback surcharge on companies repurchasing their own stock, frequently referred to as share buybacks.  This new legislation goes into force January 1, 2023.

Analysts and elected political officials have a wide range of opinion on how this may impact investors and the economy more broadly.  We believe that in addition to raising federal revenue this new legislation will also incentivize management decision-making. 

Companies with excess cash return capital to shareholders via stock buybacks and dividends.  More recently, companies have used buybacks to a greater degree than dividends.  In 2021 we saw a record year for both corporate buybacks and dividends in the S&P 500.  Buybacks totaled $881.7B which exceeded the prior annual record set in 2018 by 9.3%. Dividends totaled $511.2B, up 5.8% from 2020.[1] 

We believe that this will result it in some companies accelerating their buyback programs before year end. However, we are monitoring corporate commentary regarding changes to their future buyback programs past January 1, 2023.  Our preliminary thinking for the broad equity market is that this legislation will reduce demand for shares from a significant recent buyer of them, which on a stand-alone basis might seem like a negative.  Alternatively, some income-oriented investors may welcome this change. 

However, instead of using excess corporate cash flow to return capital to shareholders, companies may now opt to use these dollars for other purposes that are important to shareholders as well as GDP.  Some examples include pursuing acquisitions, hiring more workers, training these workers to be more productive, increasing research and development, or investing in supply chain resiliency post- COVID. 

Ultimately it will take time for the net effects of this legislation to be fully understood and analyzed for impacts to changes in recent capital allocation decisions.  We will continue to monitor both the net effect from individual company behavior as well as impacts to the broader economy.  As always please reach out to us with any questions.