POLITICS RETURNS: US political gridlock eased enough ahead of the midterm elections to set up the optimistically renamed ‘Inflation Reduction Act’ for passage. It raises personal and company taxes to fund $430 billion of clean energy and healthcare subsidies, and to trim the budget deficit. The growth and inflation impact is minimal near term, given the $23 trillion US economy and 9% inflation. It boosts the renewables outlook (see @RenewableEnergy). But the late-day inclusion of a 1% share buybacks tax threatens a key pillar of the US equity market.
BUYBACKS MATTER: These totalled near $1 trillion the past 12-months, and are record levels. This makes companies the single largest buyer of the equity market. With US stocks over 60% of the global total, this concerns everyone. Buybacks remain dominated by tech, with Apple (AAPL) alone buying over $90 billion of its own shares the past year, equal to the market cap of a Blackrock (BLK) or a BP (BP.L). A 1% tax seems small but starts to chip at a key pillar of US equities, especially during recent volatility. Also, the 1% rate could now be raised in the future.
MORE DIVIDENDS: A silver lining of the buyback tax could be to incentivise more dividend payments. The US is a huge global outlier in favouring buybacks 2:1 over traditional dividends. Many investors would favour the ‘cash-in-hand’ of dividends. Even if this increasingly ties the hands of company management, historically more reticent to cut a dividend than a buyback.
All data, figures & charts are valid as of 09/08/2022