If you’re both an investor and a wage earner, you might find yourself conflicted about how businesses should use the financial windfall from the recent $1.5 trillion tax cut, most of which will accrue to the corporate sector. That’s the same corporate sector, of course, that would both employ you and in whose individual entities you might be invested.
It’s only a few months into a 10-year tax plan, so just a small fraction of the data has been mined. While much of the early analysis has been presented through the prism of partisan politics, the nonprofit JUST Capital Group tracks the amount of a company’s tax windfall and the percentage of that windfall that’s been invested in workers, customers, products, communities, jobs and shareholders. Though one-time cash bonuses have garnered most of the headlines, the JUST Capital findings indicate that roughly three quarters of the tax savings is being returned to shareholders in one form or another.
The debate over the “right” way to employ the estimated $150 billion in tax savings that U.S. corporations will enjoy in 2018 alone often is presented as a working-vs. shareholder-class conflict. Putting aside such ethical questions, however, London Business School professor of finance Alex Edmans argues in the Harvard Business Review that share buybacks generally are the best option for creating long-term corporate value, assuming that CEOs are not incentivized to manipulate share prices over the short term.
Buybacks generally boost the stock price because the same amount of earnings is divided over a smaller number of shares; a study cited in Edmans’ article determined that “firms that buy back stock subsequently beat their peers by 12.1% over the next four years.” Edmans also asserts that “repurchases are made out of the residual cash flow after investment spending” — in other words, only after considering opportunities to buy or merge with other businesses and upgrade factory and equipment.
Now, if you’re really fortunate, you would work for a business that increased your pay and handed you a large bonus while investing in companies that used their tax savings to buy back stock. That might be as close as you’ll get to having your cake and eating it, too.