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The 1% excise tax on corporate stock buybacks that took effect at the beginning of 2022 did not play a significant role in causing the bear market in U.S. stocks.
That’s the conclusion I reached from analyzing recently released data on buyback activity in 2022. At the level of precision that the data allow, the tax had little- to no noticeable impact on the level of the overall market.
This doesn’t mean that a much higher tax on buybacks wouldn’t have such an impact. But at the current level, stock-market timers have much bigger factors to focus on than this tax.
Assessing the tax’s impact is not straightforward, since the terms “buyback” or “share repurchase” are variously and inconsistently used to refer to at least three different things:
- Announced repurchases: This refers to the number of shares that a company’s board has authorized management to repurchase, at some point in the future, if market conditions warrant.
- Actual repurchases: This refers to the number of shares that companies have actually repurchased, as opposed to those they are authorized to buy back if they feel like it.
- Net repurchases: This refers to the number of shares companies have actually repurchased, less those shares they have newly issued.
Of these three categories, the hardest to get a handle on is announced repurchases. That’s because, when a company announces a new repurchase program, it rarely reports how many shares have already been repurchased pursuant to previously-created programs. Unreliable or not, the excise tax that went into effect last year did not lead to a reduction in repurchase announcements. According to Birinyi Associates, announced buybacks totaled $1.26 trillion in 2022, up 3% from the prior year. As a percentage of the market’s total capitalization, that was even higher than the prior year, given the bear market.
The total number of actual repurchases, meanwhile, is not clear until well after the fact. That’s because this number is revealed only during earnings season, several weeks after the end of a quarter. Only last week was S&P Global able to release even a preliminary total for the end of 2022, for example. But, once again, the 1% excise tax did not lead to a reduction: Total shares repurchased in 2022 by S&P 500
SPX,
companies was 4.6% higher than in 2021.
Net repurchases are the total that should have the greatest market timing significance. That’s because, in theory, each new share that is issued by a company cancels out a corresponding share that is repurchased, leaving unchanged the total number of shares outstanding. According to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, net repurchases for the S&P 500 were not significantly different in 2022 than in 2021, after adjusting for the market’s level.
Regardless of which definition we focus on, therefore, the 1% buyback excise tax did not lead to a significant reduction in share repurchases.
There’s another reason why the 1% buyback excise tax did not have a noticeable impact on the market: It applies only to net repurchases, which are smaller than gross repurchases and smaller still than announced repurchases. Silverblatt estimates that, on a pro forma basis, the tax reduced the S&P 500’s operating earnings in 2022 by 51 basis points, or 0.51%.
That is not enough to have a “significant” impact on overall buybacks, according to Silverblatt. However, he noted, the Biden administration has proposed increasing the tax to 4%, which he says would be high enough to have such an impact.
Should market timers be worried? Given the polarized Congress, it is not at all clear that such increase has any chance of being enacted. In the meantime, the buyback excise tax is well down a ranking of factors that have or could influence the market.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: Why Biden’s 4% buyback tax could boost stock prices and dividends
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