Manufacturer Apple was the largest share buyback last year.
(Photo: IMAGO/AFLO)
Last year, US corporations bought back their own shares for almost a trillion dollars and retired most of them. Stocks benefit because supply is tighter. Also, future profits and dividends will be spread across fewer stocks. Now skeptics are wondering if this is market manipulation and a possible harbinger of a market bubble.
There is no doubt that record high share buybacks are driving prices higher. Also that profits are distorted. Because a profit that is the same or even falling compared to the previous year can increase miraculously with the help of such programs, because the financial markets usually do not look at absolute profits, but at profits per share.
Still, why shouldn’t companies buy back their own shares to make their shareholders richer? For the world’s largest buyback Apple, such spending makes sense. There are simply no attractive competitors that the iPhone maker could buy in order to further increase its profitability.
Share buybacks make sense for many corporations
The same applies to Linde, by far the largest buyback in the Dax. Given the oligopoly-like structures with only four major suppliers worldwide in the complex industrial gases sector, takeovers are out of the question. The antitrust authorities would veto it. But there is excess money every year because business is going well.
Even at Coca-Cola and many other highly profitable corporations, the money is better spent on dividends and share buybacks than using it for company acquisitions. Bayer would probably have done well to buy back its own stock instead of spending $60 billion on controversial seed company Monsanto. The list could be extended.
But the list of companies that (have to) invest a lot of money in the future is just as long. For example, the Facebook group in its Metaverse or the car manufacturers in the conversion to e-mobility. Here the point of buyback programs seems more than questionable. The suspicion arises that activist investors or company managers whose bonuses are based on share price development favor share buybacks.
In fact, introducing a tax on share buybacks would be a tried and tested way to encourage investment. Especially since annual dividends are also taxed. Both investor delights would be placed a bit more equally.
US President Joe Biden is currently trying to quadruple the one percent tax on buybacks introduced in January. He is sure of opposition from Republicans in Congress.
Higher or even new taxes should never be introduced lightly and should always be the last resort to increase revenues even further.
But the same is true of the companies and their share buybacks in lieu of necessary investments. In this respect, a debate on this, as it is currently being conducted in the USA, would definitely also make sense in Europe.
More: Record buybacks: corporations buy their own shares for well over a trillion dollars