Biden backs a tax on stock buybacks. Will it hobble the bull market?

  • By Bill Alpert,
  • Barron's
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President Joe Biden lent his backing to a tax on corporate stock buybacks, as the administration searches for revenue sources to fund its ambitious budget proposals.

The “Build Back Better” framework announced by the White House on Thursday proposes a 1% tax on buybacks, which it says “corporate executives too often use to enrich themselves rather than investing [in] workers and growing their businesses.”

A 1% tax doesn’t worry Yardeni Research’s Ed Yardeni. He worries that it might later lead to bigger tax bites. “It’s a piddling amount,” Yardeni says. “But there’s a possibility that once they’ve opened this up as a source of revenue, they’ll conclude that picking this pocket some more, makes sense.”

Buybacks have been popular among cash-rich companies as a way to reward stockholders, offset shares issued as compensation, and boost earnings per share. Tech firms such as Apple (AAPL) and Microsoft (MSFT) have led the way in the last decade, with repurchases totaling hundreds of millions of dollars. A 2% tax on buybacks proposed by Senate Democrats last month stirred worry that a such a levy would put the kibosh on buybacks and knock a leg from under the bull market.

Last month, Yardeni told Barron’s that the senators’ 2% tax wouldn’t have much impact on corporate behavior. He was even less worried about the market’s need for buyback boosts. Biden’s plan for a 1% tax won’t affect buyback behavior one iota, Yardeni said Thursday.

Companies in the S&P 500 (.SPX) have announced over 100 stock-buyback programs so far this year, and the dollar amount repurchased is on track to exceed the nearly $730 billion total of 2019. But J.P. Morgan (JPM) quant strategist Nikolaos Panigirtzoglou pointed out in a Wednesday note that a dollar count can be deceiving. Rising market valuations and record-high equity prices make recent buybacks look larger.

Adjusted for equity-price inflation, the J.P. Morgan analyst concludes that this year’s buybacks worldwide have added up to just 1% of outstanding market value. Meanwhile, the surging market has absorbed impressively high volumes of new-share issuance from sources such as initial public offerings.

What’s driving the market is aggregate earnings growth, Yardeni says.

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