Stock Buybacks Are Here to Stay

A new tax will barely dent a corporate buying spree. But be selective about investing in firms repurchasing shares.

- Kim Clark

IN THE 12 MONTHS ENDING JUNE 30, companies in the S&P 500 index spent a record $1 trillion to buy back their own shares, according to S&P Dow Jones Indices. But come January, a new 1% tax on buybacks might dampen corporate America’s appetite. S&P Dow Jones estimates the tax would reduce corporate profits by half a percentage point at current buyback rates

Buybacks have lately become controversial, with critics arguing that there are better uses for corporate cash. But a 2020 S&P Dow Jones Indices analysis of the 100 companies with the biggest buybacks found that their long-term stock returns generally outpaced the S&P 500.

Many smart investors, including Warren Buffett, are big supporters of strategic buybacks. “If a management wishes to further intensify our ownership by repurchasing shares, we applaud,” he has said.

The new tax is low enough that it will discourage only the most marginal buybacks, say experts, so don’t expect them to disappear. But buybacks can be complex to evaluate. For investors trying to navigate this changing market, a few signals can help you find stocks likely to benefit from share repurchases despite the tax. But first, the basics.

The pros. Buybacks make a lot of sense when a company can sweep up shares whose prices have been irrationally driven below true value by market swings. Such purchases signal insiders’ faith in the company and add demand that supports the stock’s price.