Investors are big winners in Republican’s tax overhaul
New York – It’s just what the GOP said we’d hear from a CEO after being handed a big tax break.
But when Charles Scharf announced plans last month to spend his company’s tax savings on higher wages and technology, investors began selling.
The Bank of New York Mellon CEO said he had a responsibility to “share the benefit” with workers and build the “company of the future.” But investors want to share in the tax bounty as well — through higher dividends and buybacks. By the end of the day, the bank’s stock was down 4.4 percent.
The biggest tax rewrite in three decades was sold by its Republican backers as a way to help American workers, and there have been plenty of announcements about bonuses and plans to buy equipment and make other capital investments to improve productivity and raise wages. But much more money has been earmarked for dividends and buybacks.
Retailer Lowe’s has authorized $7.1 billion in buybacks, triple the level planned before the tax overhaul. Radio giant Sirius XM has increased its program by a fifth to $12 billion. And Wednesday Cisco announced the biggest number of all — a $25 billion increase to its repurchase program.
Buybacks, in which companies purchase their own shares and retire them, are popular with investors because fewer shares outstanding lifts earnings per share, the most watched barometer of corporate success.
A recent survey by Morgan Stanley showed Wall Street stock analysts expect companies to allocate 43 percent of tax savings to dividends and buybacks. Capital spending and workers will get 17 percent and 13 percent, respectively.
The flood of buybacks could help drive stocks higher during a touchy moment in the market. They’ve played that role before in the nine-year bull market, as companies step in to lift share prices at crucial moments when traditional buyers like insurers and individual investors turned to sellers.
But critics note that stocks now are more expensive relative to long-term earnings than at any time since the dot-com boom and that the money might be wasted if stocks drop anyway. They also argue that money used for buybacks — trillions of dollars in recent years — is often better spent on improving operations and making workers more productive, which can lead to “real” wage increases that do more than just keep up with inflation.
“What are you getting from buying back stock? It doesn’t generate any growth, any real activity,” said James Abate, chief investment officer of Centre Asset Management.
To be sure, the tax overhaul isn’t all about buybacks and may end up helping workers, too. The conservative Americans for Tax Reform has been touting its tally of three million workers promised bonuses and other compensation gains so far, a number cited by President Donald Trump in his State of the Union address. That’s welcome news given the slow growth in wages in recent years.
But economists say to gauge the full impact of tax cuts on workers, look not to bonuses, but to how much companies are spending on software and equipment and training to make workers more productive. They say that is the way to permanently raise pay, and there indeed appears to be a pickup in these capital outlays recently.
The day the tax law was passed, Boeing said it planned to increase spending by $300 million on worker training and infrastructure “enhancement.” Defense contractor Raytheon said it will increase spending on factories and big projects by 50 percent to more than $900 million this year.
UPS said it plans to use a chunk of its tax saving — as much as $7 billion — on new planes to ship goods, automation at its warehouses and other capital spending.
Companies could also get a boost from lower taxes, as could their workers, if it leads to customers spending more.
The CEO of homebuilder Lennar told Wall Street analysts early last month that he is hoping for more business from “frustrated apartment dwellers” if new, lower tax rates make it easier to save for down payments. A day later, Delta’s president said he expected more people are going to fly because they’ll have extra spending money. General Motors is hoping lower taxes for drivers will spark more sales.
For some big companies, it’s made sense to hold back on expanding operations and producing more.
Experts say the problem those companies face, with or without the tax overhaul, is the same one they’ve faced for a least a decade: The world is awash in raw materials and goods and demand hasn’t kept up with this supply.
“If you have a big check, would you go out and buy a new car? Well, not if you don’t need it,” said David Fried, editor of the Buybackletter.com. “Companies for the most part are rational actors.”
Even companies pumping sizeable amounts of money back into their business are ramping up buybacks as well.
Thanks to the new tax law, drugmaker Pfizer last month announced it would spend $5 billion on expanding factories and other capital spending in the U.S. for the next five years, in addition to spending on bonuses and contributions to its U.S. pension fund.
That is a large funding promise, though smaller than the total authorized for buybacks. The company recently set aside another $10 billion for repurchases, bringing the total it plans to spend on its stock to more than $16 billion.
Manufacturing giant 3M said it will use $600 million of its tax saving to bolster pensions for U.S. workers and will increase capital spending by as much as $100 million this year. But the company also said it expects to increase its buybacks by more, adding perhaps $1 billion to its program.
By one count, new money earmarked to buybacks announced since the law was passed already top $160 billion. Add that to old plans for the programs, and total share repurchases this year could exceed the $589 billion record in 2007, right before stocks began to drop by more than half in the financial crisis.
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