Share Buybacks Are the Biggest Likely Destination for Tax Savings

Corporate America’s plans for the recently passed $1.5 trillion federal tax cut are bubbling to the surface, but the likeliest use of the tax savings is to buy back company stocks. The reason: Share repurchases have been the most popular application for spare corporate cash for some time now. So why change?

While specific company plans for their tax savings will take months to unveil, the early betting is that buybacks will eclipse dividend raises—not to mention capital spending and wage increases—as the top activity to fund. “The largest portion of tax savings,” Bank of America CEO Brian Moynihan told analysts in a conference call Jan. 17, “would flow to the bottom line through dividends and share buybacks.”

BofA is looking at $5 billion in new buybacks—it spends twice as much on buybacks as on dividends. It also plans $1,000 one-time bonuses to 145,000 US-based employees, which would amount to $145 million.

Already, Boeing has announced it will buy $18 billion of its shares, Home Depot $15 billion, Honeywell $8 billion, and Humana $3 billion. Many of these are expansions on existing repurchase programs.

Bloomberg Intelligence projects that buybacks will soar 70% this year, due to lower taxes (the corporate rate falls to 21% from 35%) and enticements to return US multinationals’ profits housed overseas in low-tax nations, known as repatriation.

If the past is any guide, companies will spend more on buybacks than on dividends. According to Standard & Poor’s, of the cash companies spent on shareholders for the 12 months through last Sept. 30, 56% went to buybacks. The rest were for dividends. And that has been the case for the last 10 years, S&P indicated.

The last time there was a repatriation of overseas profits, in 2004, the bulk of the money went to buybacks, a study by the Senate Permanent Subcommittee on Investigations found. The repurchases ranged from 62 to 90 cents on every dollar brought back home.

There are several reasons that buybacks find greater favor among the corporate managers who launch them. For one thing, many executives get sizable stock awards, so they benefit personally. Plus, buybacks tend to push up stock prices and earnings per share (owing to fewer shares available), key components of executive pay determinations.

Of course, regular investors also usually do well with buybacks, which are bought at a premium to market price. Some companies, feeling their shares are undervalued, are especially fond buybacks as a price enhancer, a boon to shareholders who hang onto some shares.

If indeed tax cuts touch off a buyback boom, it will mark a resurgence for stock repurchases. Buybacks, while continuing to outstrip dividends in dollars expended, have flagged a bit lately. Trimtabs research shows that buybacks reached a recent peak of $781 billion and 1,100 individual repurchases in 2015, and last year dipped to $609 billion and 763.

One theory for the slip is that some companies, concerned about the debt they took on to fund the buybacks, may have pared their plans. In addition, said Trimtabs analyst Winston Chua, “elevated equity prices” may have motivated some companies to curb their repurchasing ambitions. Certainly, with the S&P 500 levitating more than 30% last year, buying shares back gets to be a pricey exercise.

On the other hand, central banks like the Federal Reserve are retreating from their stimulus efforts, which could make for more muted stock market gains, and less expensive buybacks.

To be sure, the buyback field is dominated by a few big names, such as Apple, which spent $7.8 billion on buybacks in last year’s third quarter. Starting in 2012, it has embarked on a $175 billion repurchase program, spending far more on buybacks than on dividends. And at a price/earnings ratio of 18, its shares are not too costly.

Thanks to the new tax law, Apple says it will bring back the vast majority of its $252 billion in overseas money to the US. Recently, it has been borrowing money to underwrite its buyback program. It won’t have to do that anymore.

So, expect Apple and many others to be tendering for shares up ahead, with Uncle Sam helping to juice the plan.