The five US tech companies with the largest cash piles took advantage of President Trump’s tax reforms to spend more than $115bn in the first three quarters on buying back their own stock.
The share buybacks so far this year by Apple (AAPL), Alphabet (GOOGL), Cisco (CSCO), Microsoft (MSFT) and Oracle (ORCL), after the tax change came into force at the end of 2017, are nearly double what the companies spent in the whole of last year, making investors some of the biggest beneficiaries of a plan that was billed as a boost to US jobs.
They also increased their capital investment by 42 per cent compared with the same period last year, to $42.6bn, according to FT calculations.
Tech companies have also led a parallel trend, identified in a report released on Tuesday by Moody’s Investors Service, for US companies to channel a large part of their tax windfalls into paying down debt.
The new data add to the debate about the extent to which the tax reforms have boosted investors, rather than stimulating investment and benefiting American workers.
The National Association for Business Economics reported last month that the changes to the tax code had “not broadly impacted hiring and investment plans”.
Tech companies had been sitting on some of the largest cash piles, almost all of it stranded offshore where it escaped an immediate tax.
Last year’s Tax Cuts and Jobs Act brought these reserves into the tax net but at a reduced rate — in turn freeing the companies to use the money rather than leave it to continue to pile up.
“Most companies are using cash to buy back stock and make acquisitions, rather than invest in new facilities,” said Walter Price, a tech investment manager at Allianz. “I think this is good for shareholders and management.” Tech companies were also paying down debt they took on in previous years to buy back shares, he added.
Apple, with the largest offshore cash and investment holdings, generated headlines soon after the passage of the tax bill when it said its “direct contribution” to the US economy would be $350bn over the next five years.
Since then, it has lifted its capital spending to $14.5bn, an increase of 14 per cent from the year before. But its spending on buybacks has soared to $62.6bn in the first nine months of the year, nearly three times as much as the same period the year before.
Investors and analysts said that repatriated cash was also contributing to renewed investment. But planning new facilities takes longer than executing a buyback, and will take longer to show up in capital spending figures, said Mr Price.
“There’s a strong correlation between tax reform and capital spending,” added Youssef Squali, an internet analyst at SunTrust Robinson Humphrey, pointing at Google (GOOGL) and Facebook (FB), which plan to spend a combined $37bn between them this year, up from just under $21bn in 2017.
The US commerce department said that growth in business investment overall had slowed in the third quarter after a bumper start to the year. Brett Ryan, senior US economist for Deutsche Bank, said last week he expected a recovery in capex in the fourth quarter, followed by a gradual slowdown in 2019.
Meanwhile, share buybacks have risen 44 per cent so far this year, according to Goldman Sachs, which estimates that buybacks will climb another 22 per cent in 2019. Just 25 companies accounted for 99 per cent of the growth in buybacks this year, the bank found, underscoring the outsized influence of tech companies’ use of cash.
Moody’s analysis of a sample of 100 non-financial companies with large cash piles found that they had flipped since the tax overhaul was implemented last December from adding debt to repaying it. The selected companies repaid $72bn of debt in the first six months of 2018, close to the $81bn they spent on buybacks and dividends, and more than the $47bn they allocated to capex or research and development.
“In the aftermath of tax overhaul we have seen a drastic change in company behavior, with companies moving from a net borrower to net payer position,” said David Gonzales, Moody’s senior accounting analyst.
Tech companies have been in the vanguard, with Moody’s finding $6.5bn of incremental net debt repayments at Apple and $4.8bn at Microsoft (MSFT) compared with the 2016-2017 pace. Abbott Laboratories (ABT), Chevron (CVX) and Gilead Sciences (GILD) were also among those sharply increasing debt repayments.
The debt of US corporations has risen to pre-crisis levels of $9.4tn, or 46 per cent of domestic output, and former Fed chair Janet Yellen has voiced alarm that lending standards have loosened as memories of the crisis fade.
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