On one hand, share repurchases can be an appropriate use of cash if surplus capacity exists and firms lack productive capital investment opportunities. On the other hand, additional profits from tax reform could also be allocated to employees through higher compensation. Wage growth appears to be a key issue for Democrats as we approach the midterm elections. Further political pressure could weigh on the popularity of share repurchases in 2019.
That’s from a note out Friday evening from Goldman, and it underscores the ongoing tension re: what corporations plan to do with their excess cash, some of which comes courtesy of Trump’s tax cuts.
It should go without saying that companies are going to allocate a disproportionate share to buybacks and dividends and anything else that enriches capital at the expense of labor. That’s how this game works and that’s how it will always work, regardless of what Republicans tell you. There was of course the obligatory dog and pony show earlier this year when Trump and the GOP touted one-time bonuses and free Ho Hos and Ding Dongs as “evidence” that the tax cuts were indeed all about the Middle Class and that trickle down works after all, despite all historical evidence to the contrary.
Now to be fair, it’s always nice to see working people getting a thousand dollars they didn’t expect to receive and for a lot of those folks, a thousand dollars is a big fucking deal. But really, that just kind of underscores the Marie Antoinette-ish character of this whole thing: “Let them eat rounding errors on C-Suite paychecks.”
Or better yet, let them eat Ho Hos and Ding Dongs. Recall this from a January Bloomberg piece:
Hostess Brands Inc., feeling flush after last month’s tax overhaul, will offer bonuses to workers – including [a year’s worth of] free snacks.
The company, which makes Twinkies, Ding Dongs and Ho Hos, is providing its employees one-time payments of $1,250 – with $750 in cash and $500 in the form of a 401(k) contribution. In taking the step, Hostess cited last month’s tax legislation, which slashed the rate for U.S. corporations.
They won’t be able to eat all the Ding Dongs they like.
A representative from each of Hostess’s bakeries will choose a product each week, and the employees will be able to take home a multipack of that item.
According to TrimTabs, corporations spent some $300 billion on buybacks and takeovers in Q1 versus just $130 billion in pretax wage growth. “The recently enacted corporate tax cut is likely to deliver far more benefits to top management and investors than to typical American households,” the firm’s David Santschi, told CNBC.
Right. And when you throw in the fact that buybacks are far and away the biggest source of demand for U.S. equities, what you come away with is a situation that is quite literally making the richer richer by design. Stocks falling? No problem, $800 billion+ (on JPMorgan’s estimates) in buybacks in 2018 will fix that right up.
As I put it earlier this year, buybacks are the real “plunge protection team.” Don’t forget this chart:
As tipped here months ago, Goldman’s buyback desk has been jumpin’ off the hinges in 2018. In fact, it had its most active two weeks in history in February and according to the same note cited here at the outset, the GS buyback desk has seen a 62% increase in activity YTD (y/y). Here’s more:
S&P 500 buyback authorizations YTD have totaled $205 billion, representing a 48% jump vs. the same point in 2017. Info Tech has authorized $90 billion of buybacks in 2018, representing 44% of the S&P 500 total (see Exhibit 1). Firms have recently expressed a preference for buybacks over dividends. Dividend payout ratios are lower than history at 35% and we forecast S&P 500 dividends per share will grow by 10% in 2018.
What about M&A? Well, Goldman has some numbers for you on that too. To wit:
The outperformance of potential M&A targets in 2018 has stood out relative to other use of cash strategies. US acquisitions surged in 1Q 2018 to $473 bn (+66% year/year), the fastest start on record.
And look, there’s nothing “wrong” with any of that – per se. Rather, the problem is how disingenuous about it Trump, the GOP and the right-wing blogs have been. There is no ambiguity with regard to what’s going on here. The tax cuts aren’t a “Middle Class miracle”. Exactly no one other than the gullible Trump supporters who are – bless their hearts – still buying into his phony populism and feigned concern for everyday Americans believe the tax cuts had anything whatsoever to do with an earnest effort to facilitate wage growth and/or otherwise improve the plight of the disaffected masses.
That was always a joke and the numbers will continue to support that assertion.
The only reason Trump is happy when he sees nascent signs of wage growth is because it boosts his image with voters and while that would be true of almost all politicians, something tells me it’s even more true with this President. Call it a hunch, but I don’t think this guy gives two shits about you and your family:
Oh, and speaking of you and your family, guess who owns all the stocks that benefit from all of the financial engineering described above? Hint: It’s not your household…