Young Research & Publishing Inc.

Investment Research Since 1978

Disclosure

  • About Us
    • Contributors
    • Archives
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Dynamic Maximizers®
  • Retirement Compounders®
  • Free Email Signup

The Real Reason Firms Buyback Stock

October 3, 2019 By Jeremy Jones, CFA

By iQoncept @ Shutterstock.com

The pols are out trying to punish firms that buy back their own shares. The left wants to ban buybacks unless a company agrees to a litany of their demands. The right wants to put buybacks and dividends on equal footing by taxing buybacks.

Neither approach is a good idea. If the government bans buybacks, acquisitions and conglomeration are likely to increase—both have a higher probability of destroying value.

The politicians are attacking this from the wrong direction. As we have written in the past, buybacks started to soar in the 1990s after executive pay for public firms became non-deductible. The unintended consequence was a surge in stock option issuance, greater buybacks to increase the value of those stock options, and a widening gap between what executives make and what the average worker makes.

Change the incentive for companies to compensate their top executives with stock options, and buybacks would likely fall out of favor with management teams. Go a step further and eliminate the tax on dividends and there would be even less justification for buybacks.

The WSJ summarizes.

Yet politicians are now targeting buybacks to claim tax reform hasn’t worked. Senators Chuck Schumer and Bernie Sanders have suggested a ban on buybacks. To get an exemption from the ban, companies would have to fulfill a progressive wish list: pay wages of $15 an hour, provide “decent pensions” and more. The Senators criticize Walmart for announcing “plans to spend $20 billion on a share repurchase program while laying off thousands of workers and closing dozens of Sam’s Club stores.”

Florida Republican Marco Rubio is taking his own swing at stock repurchases, with no better logic. He tweeted recently that he is writing a bill to “tax corporate buybacks same way as dividends. No tax advantage for buybacks over dividends.”

It’s hard to know what this means precisely without seeing the details. But say a company with 100 shares did a buyback of shares worth $200. Mr. Rubio’s plan reportedly would treat that like a deemed dividend of $2 per share, applicable to all stockholders, regardless of whether they sold. Meantime, everyone’s cost basis would be raised by the same amount, reducing the eventual capital gain by $2 per share. It’s theoretically a wash, except the tax would have to be paid up front.

Read more here.

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • Should You Buy Apple Stock?
  • How Expensive is the Stock Market?
  • Harley-Davidson: Young Research’s Stock of the 90s
  • Author
  • Recent Posts
Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #10 in CNBC's 2019 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
Latest posts by Jeremy Jones, CFA (see all)
  • Jim Simons’s Renaissance Technologies vs. Internet Forum Traders - January 15, 2021
  • Biden Plans to Spend Trillions More on COVID-19 Stimulus - January 14, 2021
  • Overtaken By Nvidia, Intel Fires Bob Swan - January 13, 2021

Search Young Research

Most Popular

  • Do You Remember When NASDAQ Dropped by 82%?
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?
  • Gavekal Chairman: Renewables Bubble is "Stupidest" Ever
  • Don’t Be on Their Radar, Get Out of Debt Now
  • Democrats Eager to Get Back to Protecting the Rich by Ending SALT Deduction Cap
  • Stocks: Are You Sticking Your Neck Out Too Far?
  • H2O, Skiing, Hiding A$$ET$, Bitcoin, Ammo & More
  • There's Always a Way Forward for Americans Like YOU
  • Overtaken By Nvidia, Intel Fires Bob Swan
  • The Power of a Compound Interest Table

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Could this Be the Vanguard GNMA Winning Edge?

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

RSS The Latest at Richardcyoung.com

  • Insurrection Was the Furthest Thing from Trump’s Mind
  • Who Are Those Urging Violence?
  • Are $2,000 Checks Going to Rebuild NYC?
  • An Alert for Warm Weather, Wine Loving Mavens.
  • Key West’s Number One Restaurant: The Thirsty Mermaid
  • VIDEO: Henry U.S. Survival AR-7
  • Cancel Culture, the Great Purge, Double Standards
  • How Are You Doing on a Local Level?
  • We Support Censure of Flake, McCain and Ducey
  • Zinc: The Gatekeeper of Immune Surveillance.

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Social Media

  • Facebook
  • Twitter
  • Youtube
  • Pinterest

Copyright © 2021 | Terms & Conditions

loading Cancel
Post was not sent - check your email addresses!
Email check failed, please try again
Sorry, your blog cannot share posts by email.