Stocks as Medicine, Poison for Growth... Global Listed Companies Triple Their Share Buybacks

"Last Year, 1,200 Companies Bought $1.3 Trillion"
Short-Term Stock Price Rise... Long-Term Negative Impact on Investment Capacity
Controversy in US Politics and Business Circles
Biden: "Corporate Stock Buyback Tax Rate Should Increase from 1% to 4%"

The scale of share buybacks by major global listed companies last year was found to be three times larger than a decade ago. Concerns have been raised that share buybacks, which use a company's future investment funds to boost stock prices, could hinder the company's long-term growth.

Share Buybacks Triple Over 10 Years

On the 16th (local time), Janus Henderson, a US asset management firm, announced that 1,200 global listed companies repurchased a total of approximately $1.3 trillion (about 1,742 trillion KRW) worth of shares last year. This is three times the amount from 10 years ago and significantly exceeds the growth rate of shareholder dividend payments (54%) over the same period.

The trend of expanding share buybacks, which has become a norm in the US capital market, appears to be spreading globally. The scale of share buybacks by US listed companies increased threefold from $333 billion (about 446 trillion KRW) in 2012 to $932 billion (about 1,249 trillion KRW) last year. During the same period, the UK saw an increase from $22 billion (about 29 trillion KRW) to $70 billion (about 94 trillion KRW), more than tripling, and Europe (excluding the UK) also more than doubled to $148 billion (about 198 trillion KRW).

By industry, companies in the oil sector, which posted astronomical profits due to high oil prices, significantly increased their share buybacks. These companies repurchased shares worth $135 billion (about 181 trillion KRW) last year, four times the amount from the previous year.

The parade of share buybacks by global companies continues. This year, major companies such as Apple, Meta, Airbnb, HSBC, and Compass have announced share buyback plans one after another. Following Meta's announcement of a $40 billion (about 54 trillion KRW) and Goldman Sachs' $30 billion (about 40 trillion KRW) share buyback plans, Apple also announced on the 4th that it would repurchase $90 billion (about 121 trillion KRW) worth of shares after its Q1 earnings report.

Tim Cook, Apple Chief Executive Officer (CEO)

Short-term Stock Price Rise... "Poison for Long-term Growth"

In fact, share buybacks are welcomed by shareholders. When a company uses its cash reserves to repurchase shares, the number of shares circulating in the market decreases, increasing the likelihood of a stock price rise, making it a representative shareholder-friendly policy. Earnings per share (EPS), which companies use to evaluate management, also increases. Many countries impose heavy taxes on dividends, but capital gains from stock price increases are taxed less or not at all, making it advantageous for shareholders from a tax perspective. Share buybacks benefit both management and shareholders.

However, this can be seen as a win-win situation for companies and shareholders only from a short-term perspective. If a company uses its cash reserves for share buybacks instead of investment funds, its capacity for growth and job creation diminishes accordingly. While share buybacks may benefit shareholders and management seeking short-term profits, from the perspective of a company's future growth and long-term investors, share buybacks can actually be a poison that erodes corporate value.

Daniel Ferris, fund manager at Federated Hermes, described share buybacks as an "environmental risk," pointing out that they benefit "traders, hedge funds, senior management, and short-term stock prices." Newton Investment Management CEO Yuen Munro said, "We want share buybacks to be less common," adding, "If misused, share buybacks can be used by management to manipulate EPS to meet mid-term management incentive targets. This sacrifices important investments for the company's long-term soundness."

There is also analysis that share buybacks do not necessarily help stock prices. According to the Invesco fund, which tracks corporate stock prices, companies that conducted large-scale share buybacks over the past decade underperformed the US market returns. Ray Himsworth, UK equity fund manager at Fidelity, said, "If the stock price does not rise after a share buyback, it means the company has used up its cash, making the situation worse," adding, "Shareholders may feel they have not actually been rewarded."

Biden Proposes "Increased Tax on Share Buybacks"... Conflict Between US Politics and Business

President Joe Biden of the United States

The expansion of share buybacks by companies has become a contentious issue in both US politics and business circles. Politicians criticize that share buybacks concentrate benefits only among some executives and major shareholders, i.e., the wealthy.

US President Joe Biden proposed raising the excise tax rate on share buybacks from the current 1% to 4% in his State of the Union address last February. This follows the Inflation Reduction Act (IRA) introduced last August, which began imposing a 1% excise tax on share buybacks starting this year. Biden argues that the rate should be increased fourfold. In response, Warren Buffett, chairman of Berkshire Hathaway, harshly criticized President Biden in his annual letter to shareholders, calling him an "economic illiterate" and a "political agitator."

The US Securities and Exchange Commission (SEC) is currently pushing for expanded disclosure requirements related to share buybacks, but the US Chamber of Commerce strongly opposes this, arguing that share buybacks play an important role in stabilizing and improving capital markets.

Experts predict that while the trend of expanding share buybacks is unlikely to reverse, it may naturally subside if corporate profitability weakens due to an economic recession. According to Goldman Sachs, the scale of share buybacks by S&P 500 companies is expected to decrease by 5% to $808 billion (about 1,083 trillion KRW) this year compared to the previous year. Dividend payments are expected to increase by 5% to $628 billion (about 842 trillion KRW) during the same period.

David Kostin, chief US equity strategist at Goldman Sachs, forecasted, "The slowdown in US corporate profits, increased policy uncertainty due to recent banking stress, and high valuations could create headwinds for share buybacks."

This content was produced with the assistance of AI translation services.