Stock buybacks have reached $1.1 trillion this year — and investors would do well to consider the implications. $800 billion in stocks have been purchased so far, and another $300 billion remain as companies celebrate the new tax laws and prepare for the coming year. Though many analysts believe that corporate spending will be pulled back on in the coming months, these stock buybacks indicate that companies nevertheless have faith in their own valuations.
A driving force behind the buybacks is the money that corporations are now saving due to the new tax laws. New tax laws reduced the overall tax rate for corporations while also making it more affordable to make money in foreign lands. Some of the largest companies in the world are going to experience the largest tax breaks, and are consequently reinvesting money in themselves.
For many companies, it makes sense to initiate large scale buybacks, as this can improve the company stock. For some businesses, improving the company stock is now more important; the stock market has been extremely volatile lately, and many believe that it could be headed for a crash. When companies are doing well, extra money can either be reinvested into the company (to enrich stakeholders) or placed elsewhere (to further expand the business).
Buybacks aren’t only due to the better tax laws; they are also indicators that CFOs are confident that their companies will continue to do well. In the past few months, many companies have seen their stocks fall due to threats regarding the American economy. It’s been believed that trade wars with China, Brexit, and other similar issues could ultimately impact many businesses.
Buybacks indicate that CFOs may believe that these fears are overblown. If the dust settles and companies begin to improve upon their valuation again, then now would be the correct time to make a purchase. This is also assuming that there are no major economic setbacks in the next year.
Though CFO confidence can drive buybacks, there’s also another reason buybacks can occur: when CFOs want to artificially boost the price of their stocks. It is possible that CFOs are attempting to restore faith in their companies even though they know that their fundamentals may not necessarily support this valuation. In the past, buybacks have been sued to drive up prices.
Further, some analysts believe that it’s better for a company to invest in its infrastructure, employees, marketing, and future rather than attempting stock buybacks — and, consequently, companies that are engaging in high levels of buybacks may not have the best strategy in mind. A buyback is generally perceived to simply shift value back to shareholders.
While all of this is occurring, it should be noted that many believe that companies are going to cut back on their spending in 2019, and that stock prices are likely to go down overall. There are many upcoming issues — such as the Chinese tariffs — that could make the economy volatile, and many investors are still expecting some type of market crash.
It’s currently believed by nearly half of financial analysts that a recession is coming in 2019, and if it doesn’t happen in 2019 it only becomes more likely in every subsequent year. This may seem contrary to these new buyback initiatives, but it may also indicate that CFOs are confident in their own companies and believe they will see their own stocks rise.
Ultimately, the new tax breaks have been beneficial for many businesses — and even though economic turmoil may be on the horizon, companies are clearly invested in their own valuations. If corporate buybacks are any indication, these companies are likely to increase in value in the coming year. However, with the current volatility of the market and a large crash looming on the horizon, investors should be wary.
Regards,
Ethan Warrick
Editor
Wealth Authority
