Don’t Fall for Corporate America’s Dirty Trick

EBay … $6 billion. Alphabet … $8.6 billion. Pepsi … $15 billion. Wells Fargo … $22.6 billion. Cisco … $25 billion. Apple … $60 billion.

Wage increases? Bonuses? Capital expenditure? Job creation?

Nope. Planned stock buybacks for 2018, fueled by the recent corporate tax cut.

So far in 2018, U.S. companies have announced more than $178 billion in planned buybacks. That’s the largest amount ever for a single quarter … up almost 80% year to date vs. 2017.

It wasn’t supposed to be this way.

The Trump administration and Congressional Republicans swore up, down and sideways that the tax cuts were going to produce wage increases, investment and jobs.



So far just 6% of the tax cut windfall has gone to pay hikes, almost all in the form of heavily-publicized one-off bonuses.

By contrast, announced stock buybacks exceed worker bonuses and raises by a factor of 63.

Stock buybacks are not a good thing. They distort the stock market. They encourage financial shenanigans and discourage investment. They weaken the economy.

Now this once-illegal activity is the single largest short-term driver of the stock market … a trap waiting for you.

Partying Like There’s No Tomorrow

Since 2008, U.S. companies have spent $5.1 trillion to buy back their own stock. That’s 54% of the profit of companies in the S&P 500 over the period.

There’s a strong argument that the recent performance of the post-2009 bull market has been based primarily on share buybacks, in two ways.

First, buybacks artificially reduce a company’s price-to-earnings (P/E) ratio, because reducing the number of shares outstanding increases apparent earnings per share (EPS). Issuing dividends rather than investing cash does the same thing.

In this way, companies can appear more profitable even if their actual profits aren’t growing. More than 40% of total EPS growth between 2009 and mid-2017 was based solely on share repurchases and dividends:

Trump Administration and Congressional Republicans

The second way share buybacks distort market performance is by reducing volatility.

Corporations are large, price-insensitive buyers. They’re always ready to purchase their own shares whenever they weaken a bit. That in turn insulates the market against drops. That creates lower volatility and lower liquidity, which in turn incentivizes more share buybacks.

Lower volatility leads retail investors and algorithmic trading systems to think stocks are safer than they are. Everyone piles into stocks, which lowers volatility further, until there’s a big blow-off … as in February.

That Big Sucking Sound You Hear

Over the past decade, U.S. companies have increased buybacks to the point where they are now collectively the largest single buyer of stocks.

The sellers of those stocks have been individual households and institutions like pension funds, insurance companies and charitable trusts:

Trump Administration and Congressional Republicans

The result is a massive transfer of wealth from households to corporations. Returns that used to go to individual and institutional investors are now being swallowed up by corporations.

As a result, corporations now hold more than one-third of cash in the U.S. economy — $1.5 trillion. And their pile is growing fast:

Trump Administration and Congressional Republicans

Thanks, Fed!

The driver of this massive increase in share buybacks lives in plain view: historically low interest rates. Increases in corporate debt closely track changes in share buybacks:

Trump Administration and Congressional Republicans

In other words, despite having piles of cash, U.S. corporations are actually borrowing money to buy back their own shares.

And why not, when the margin between the cost of borrowing and share price manipulation is so huge?

There’s no mystery in this: Share buybacks are ridiculously profitable. Just look at the returns to share price and dividend manipulation compared to investment in job-creating capital, or even merger-and-acquisition activity:

Trump Administration and Congressional Republicans

Who benefits from those returns? Mainly corporate executives. After all, the value of their stock options goes up with their company’s share price. It makes their decision to buy back shares a no-brainer.

The Trump Administration and Congressional Republicans Hope You Won’t Notice

Just after the tax bill passed, retail giant Walmart announced it was granting a $1,000 bonus to celebrate. It soon emerged that employees were eligible only if they’ve worked in the company for 20 years. That ruled out nearly all shop-level workers … those who need it most.

Here’s something else: The total value of Walmart’s bonuses was $400 million. The value of the tax cut to the corporation will be $18 billion. So only 2% percent of its tax cut is going to its (best-off) workers.

Stock buybacks have helped to concentrate income and wealth among the richest U.S. households. After all, the top 10% of households own 86% of all stocks. Buybacks appear to have little to no impact on real investment or job creation.

That’s bad enough, especially if you’re still in the workforce. But the fact that stock buybacks — once illegal, now pervasive — heavily distort the stock market most of us rely on to fund our retirement is every bit as bad.

That’s why it’s so important to follow our gurus here at Banyan Hill … we’re after true value, not cheap financial flimflam.

Kind regards,

Ted Bauman

Editor, The Bauman Letter

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  • adrian mungiu

    Ted Bauman complains that corporate buybacks are raising the price of stocks and lowering volotility! He claims business is buying their own stock back from “individual households and institutions like pension funds, insurance companies and charitable trusts”. And somehow he concludes that business buying stock back from shareholders has resulted in
    “corporations now hold(ing) more than one-third of cash in the U.S. economy”. Huh? So buying stock makes one cash rich? I personally always have less cash after buying items– stocks or otherwise. He is complaining because not enough of the tax decrease recently enacted has gone into employee salaries and bonuses to his liking. He claims the amount is only 6%, but does not tell you where that figure comes from. Does it include the money being brought back from overseas’ accounts by big business? He also claims that “announced stock buybacks exceed worker bonuses and raises by a factor of 63.” So if 63×6=378, business is buying back stock worth 378% of their tax reduction…right. Maybe Mr. Bauman might try to figure out which companies will be buying back their own stock in the near future and give his readers something of value, unlike his opinions.

  • Will Corsair

    Stock buybacks were always at the top of the list. The right wingers, corporatists, libertarians, and assorted Wall Street types got their holy grail–tax cuts and low repatriation rates–with no strings attached. That’s why so many Republicans aren’t running for election again–they got what they’ve been blathering about for 25 years They’d have their heads handed to them by voters in late 2018 when the voters realized that Lucy moved Charlie Brown’s football again. If the gutless wonders in the Republican party wouldn’t put restrictions on how the repatriation was to be used, then we can’t blame the corporations.

  • 1775concord

    If the company buys back its stock, thee are less shares outstanding, and the value of each individual share (say, in someone’s retirement plan) goes up…better price when you sell.

  • CaptainDunsel

    I work for a well known multinational who’s brands are known world wide. Despite having another very profitable year the company has made cuts to its North American workforce to “remain competitive” & according to the annual statement will be using the savings to fund new products. Also proudly announced is that the company will be increasing its annual share buiybacks from $3 billion to $5 billion for the next 3 years.

    The $15 billion that will be spent in 3 years will not modernize one plant, bring one new product to market, improve the wage of one worker, etc. but in the eyes of the senior leadership team spending the money is share buybacks is of a higher priority than investing in the future. And with that mindset, should we be surprised at why many American companies are losing market share to other foreign companies?

  • Will Corsair

    And, 1775concord, that pretty well sums up everything that’s wrong with this picture. Everyone’s looking only at their own bottom line. Screw everyone else.

  • DJD

    Wal-Mart had a $3.4 billion Federal tax bill last year. Is the $18 Billion savings over the next 10 years? If it is, how can you make the legitimate comparison between the current bonus being the sole bonus over the next 10 years. Plus,the bonus the company gave is 11 months before the fiscal year ends. The company advanced paid the bonus to the tax savings. Do you think that is bad? How do you know what the company will do with the future years’ tax savings?

  • Ektor

    First off, if many of these companies are going to see tax relief, thus creating a wealth of cash, then why do they need to keep borrowing to fund stock buybacks as the article suggests? Next, we all know that these tax cuts will be short lived since Democrats are likely to regain some control of Congress and nix the tax cuts and actually raise taxes, likely within the next three elections of 2018, 2020 or 2022. And lastly, if 10% of households own 86% of all stocks, there wouldn’t be much trading going on and even less volatility. I agree that the top 10% hold enormous amounts of wealth, but these numbers don’t seem to quite jive in my mind. In any event, once again another great tax hoax has been perpetrated by Congress on the average American who will continue to struggle in a supposedly robust economic environment. With less stock supply and greater demand, especially by the rich and corporations, is there any doubt that the markets won’t double from here over the next 5-10 years? And 3/4 of the country won’t feel any extra bulge in their wallets.

  • SurfaceUnits

    The last time corps brought back offshore money HP fired 14000 employees, and the money went to help the wealthy as always

  • Chuck Morse

    If you don’t like the deployment of tax savings in stock buybacks, you could always do as millions of Americans have done. Buy stock in the companies that are so profitable and join in the fun! Corporations are formed to profit owners (shareholders.
    For example, when the value of Walmart ‘s stock increases, most 401k’s benefit. Then the owners spend the profits in retirement at Walmart!