Buy High, Don’t Buy Low. Prices are sky-high and but companies are buying them back like never before.
By Wolf Richter for WOLF STREET.
Combined, but heavily concentrated at the top, the companies in the S&P 500 Index bought back a record of $234.5 billion of their own shares in Q3 2021, according to preliminary estimates by S&P Dow Jones Indices, blowing by the previous record of $223 billion in Q4 2018. And there’s more coming, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, cited by the Wall Street Journal: Buybacks in Q4 would set a new record of $236 billion, he said.
This comes on the heels of a proposed tax of 1% on share buybacks in the “Build Back Better” bill that passed the House on November 19 and is now hung up in the Senate, where the tax hasn’t generated the storm of opposition that other measures in the bill have.
Buy high. Don’t buy low.
These buybacks come after share prices have surged in a historic manner, following a historically reckless money-printing binge by the Fed and other central banks, and by historically reckless interest rate repression in face of red-hot and worsening inflation.
But note how buybacks collapsed to $89 billion in Q2 2020 and to $102 billion in Q3 2020, after share prices had plunged. This was based on the corporate strategy of buying high to drive up share prices even further when they’re already high, and not buying when share prices are low.
When prices are high, this is also when insiders are dumping their shares, as they’re now doing, and it’s that much more important for companies to buy back those shares that insiders are dumping.
How much difference would 1% in taxes make?
Microsoft announced in September that its board approved another round of $60 billion in share buybacks. A 1% tax on it would cost Microsoft $600 million – not huge for a company the size of Microsoft. But not negligible either.
But if the company can get the buybacks done before the tax becomes effective, if it becomes effective, it would save $600 million while re-absorbing the shares that its executives are dumping hand-over-fist.
And those buybacks work wonderfully when executives themselves are dumping like there’s no tomorrow: For example on the Wednesday before Thanksgiving, Microsoft CEO Satya Nadella dumped over 50% of his Microsoft stock in numerous trades in just one day. But the stock barely budged because Microsoft itself was busy buying back shares, and by Friday December 10, shares closed near the pre-dump high.
What does it mean when executives are dumping their shares while the company is buying them back, after a huge parabolic run-up in share prices, fueled by the greatest money-printing binge ever and by interest rate repression, which are now heading into trouble under the withering bout of inflation that those monetary policies have fueled? That was a rhetorical question.
Since the beginning of 2012, the S&P 500 companies have bought back nearly $5.68 trillion of their own shares. A 1% tax would amount to $56.8 billion in additional costs to them.
Over the past four quarters, S&P 500 companies bought back $742 billion of their own shares. A 1% tax would amount to $7.2 billion in additional costs. Not huge. But much of it would be concentrated on the 20 companies that are buying back the largest amount in shares.
New entries into the buyback hall of fame.
Hertz Global Holdings – which emerged from bankruptcy this year and then held an IPO to give the Private Equity firms that had bought it out of bankruptcy a way to unload their stakes – announced in November that it would buy back up $2 billion of its shares, even as the PE firms are unloading their stakes.
This announcement followed other announcements designed to manipulate up its share price so that these stakeholders could make more money when they dump their shares.
The flashiest trick was the announcement on October 25, when Hertz said that it had made a deal with Tesla to buy 100,000 Teslas, that caused its shares to jump over 10%. At the time, I called the announcement a “Propaganda Coup for Hertz’s ‘Selling Shareholders’ & for Tesla.” A week later, Musk tweeted that there was no deal, as “no contract has been signed yet.”
Hertz will do anything to manipulate up its share price to allow the “selling shareholders,” as the group of PE firms are called, to maximize their profits as they’re dumping their shares. And share prices have sagged despite these shenanigans, but would have sagged a lot more without them, from the post-Tesla announcement closing high of $35 a share to $24.92 on Friday.
Another new entry into the mega-share buyback clique is Dell, which announced in September that it would buy back $5 billion of its own shares.
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