We're starting to learn what America's biggest companies are doing with the huge windfalls from President Donald Trump's tax cuts. And the answer is great for investors – but not so great for workers.
That's because many companies are returning huge portions of their billions in tax savings to shareholders in the form of share buybacks and dividend increases — not necessarily new hiring and investment.
Companies are on track to plow a record $1 trillion into boosting dividends and buying back their own stock this year, says Howard Silverblatt, senior index analyst S&P Dow Jones Indices.
Buybacks are a strategy to boost stock prices – by reducing the number of shares outstanding, which artificially increases a company's earning per share. But they do little to improve the economy.
Companies in the S&P 500 have also increased dividend payments to shareholders 182 times so far this year, giving investors greater incentive to buy and hold their shares, according to Silverblatt.
The Trump tax cuts, which slashed the corporate tax rate from 35% to 21%, boosted corporate profits overnight for many big firms. Combined with the new provision that caused U.S. companies to repatriate billions in overseas earnings, many companies are awash in cash.
But, says Michael Patcher, an analyst at Wedbush Securities, "The tax law didn’t do anything to provide an incentive to employers to create jobs. There’s nothing in there that would suggest that employers have a particular incentive to hire more people or pay the ones that they have more money.”
Apple, as usual, is leading the pack with a record-breaking $100 billion stock buyback. That's a huge chunk of the $252 billion in foreign profits that it brought back to the U.S. because of Trump's tax bill.
Here are some of the biggest stock buyback announcements so far in 2018, according to Kiplinger.
- Apple – $100 billion
- Cisco – $25 billion
- Wells Fargo – $22.6 billion
- Pepsi – $15 billion
- AbbVie – $10 billion
- Amgen – $10 billion
- Google parent Alphabet – $8.6 billion
- Visa – $7.5 billion
- eBay – $6 billion
Investors can expect even bigger buybacks after the first half of the year ends, says Silverblatt.
"Buybacks are a short-term win-win situation with immediate net gratification," he said. "Buybacks move quicker and have more flexibility. So we’re seeing those increase quicker in response to shareholder demands."
The record-breaking buybacks are especially great news for executives at the companies whose compensation is tied to the stock price because it makes the stock more valuable. Apple stock jumped following the buyback announcement on May 1 and is up more than 11% so far this month.
To be sure, Apple – like many other companies – has announced huge, multi-year proposals to invest in U.S. jobs. In January, CEO Tim Cook revealed a five-year, $350 billion plan that includes building a second headquarters as a result of the $38 billion a year the company is saving on taxes.
Other companies like AT&T, Walmart and Bank of America announced one-time bonuses of $1,000 for eligible employees as a result of tax cuts. But, a survey by Morgan Stanley predicted that workers would get 13% of the tax windfall – compared to 43% that was expected to go to investors in the form of stock buybacks and dividend increases.
Last week, political activist Ralph Nader wrote an open letter to Apple CEO Tim Cook imploring him to spend the tech giant’s influx of cash on workers instead of short term benefits for executives and investors.
“For less than 2 percent of your $100 billion buyback, or $2 billion, you could award a full year’s pay bonus to the 350,000 Foxconn workers who build your iPhones,” Nader wrote. “Think of the economic relief and happiness that gesture would produce. These workers sweat for your immense wealth in difficult workplace conditions, unable to afford the Apple phones they manufacture for your company’s massive profits.”
None of this behavior is a surprise for analysts, said Patcher, the Wedbush analyst. Companies like Apple have already been enjoying the fruits of the rising economic tide and have already made most of the investments that make sense to them, he said. This means they don’t need to put any of their newly earned cash toward new jobs and major projects, especially now that they're even more profitable than before.
"When public companies make more profit it is incumbent on those companies to do the best thing for their shareholders," he said. "The only reason any of them would invest more in the U.S. is if we changed the tax structure so that it's advantageous to invest in the U.S."