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Companies Use Tax Cut Savings To Buy Back Their Own Shares
President Trump promised that his tax cut would encourage companies to invest in factories, workers and wages, setting off a spending spree that would reinvigorate the American economy.
Companies have announced plans for some of those investments. But so far, companies are using much of the money for something with a more narrow benefit: buying their own shares.
Those so-called buybacks are good for shareholders, including the senior executives who tend to be big owners of their companies’ stock. A company purchasing its own shares is a time-tested way to bolster its stock price.
But the purchases can come at the expense of investments in things like hiring, research and development and building new plants — the sort of investments that directly help the overall economy. The buybacks are also most likely to worsen economic inequality because the benefits of stocks purchases flow disproportionately to the richest Americans.
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The tax overhaul is the cornerstone of Mr. Trump’s economic plan. It has been a big win for companies, offering lower corporate rates and a permanent break on overseas profits. Warren E. Buffett said in his annual letter to investors on Saturday that his company, Berkshire Hathaway, enjoyed a $29 billion gain thanks to the new tax law.
What companies do with the trillions of dollars they’re bringing back to the United States, and the money they will save each year on their tax bills, will in large part determine whether the plan is a success or a failure.
As the tax cuts kick in, companies have laid out a variety of uses for the money. Some are paying out one-time bonuses to employees. Others are raising salaries. Others plan to open new factories.
In the fourth quarter, American companies’ investments in things like factories and business equipment grew by 6.8 percent. That was the fastest growth rate since 2014, but far from a giant the surge in capital spending that was promised ahead of the tax overhaul.
But the buying back shares is also at record levels.
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