If the current trend from the first quarter continues, share buybacks could hit a record high in 2018.
What is a share buyback? A share buyback provides returns to shareholders by raising the price of their shares due to the purchase of a company's own shares. This type of arrangement is particularly prevalent in the US, which differs from the UK where dividend payments are favoured.
The recent US corporate tax cut, from 35% down to 21% has resulted in the cash being used for buybacks in many cases, with $178 billion spent on these in the first quarter, beating the previous record of $172 billion set in the dark days of the third quarter of 2007.
Bad for business?
Are share buybacks a negative thing for the long term health of a company? There are differing schools of thought on the subject, with some saying that the increased wealth received by shareholders is reinvested elsewhere, benefiting the economy as a whole and some contending that share buybacks soak up capital that could be spent on research & development and other measures that could support the growth of the company in the long term.
According to Jesse Fried and Charles Wang of Harvard Business School however, corporate investment has not fallen despite the latest increase in buybacks. Capital expenditure and research and development has been rising as a percentage of revenue amongst companies listed on the S&P 500.
Harbinger of market turmoil?
Firms will naturally try to buy their stocks when they are down on value in order to reduce their costs, potentially lulling investors in to a false sense of security due to the lowering of volatility according to Stephen Gandel of Bloomberg.
In this way, "stability breeds instability" as stated by economist Hyman Minsky.
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The value of investments and income from them may go down as well as up and you may not get back the original amount invested.
Information is based on our current understanding of taxation legislation and regulations which is subject to change.
Past performance is not a reliable indicator of future performance.
Share buybacks are soaring - is this a sign of market turmoil ahead?