Proactive Investors - Love them or hate them, share buybacks are all the rage right now.
In the first month of 2023 alone, US corporations announced a colossal US$132bn in share repurchases, more than triple the amount announced in January 2022 for a new record, according to data compiled by Birinyi Associates.
Energy giant Chevron Corporation (NYSE:CVX)’s US$75bn buyback took the gold medal, while Facebook (NASDAQ:META) parent Meta Platforms sought to fend off irate investors with a US$40bn repurchase plan of its own.
They're particular popular with Big Oil, with ConocoPhillips (NYSE:COP), Baker Hughes, SLB (formerly Schlumberger (NYSE:SLB)) and Marathon Petroleum (NYSE:MPC) all joining in on the action.
On the London market, Shell PLC announced a US$4bn (£3.3bn) buyback on 2 February, following US$18bn in buybacks in the preceding 12 months.
BP plc (LON:BP) today announced a US$2.75bn buyback while announcing a plan to commit 60% of 2023 cash surpluses to buybacks in 2023.
BP will cough up a total of US$8bn of capital expenditure into transition technologies from here until 2023.
Why are buybacks controversial?
Opponents of share buybacks, which given his plan to impose a 1% levy on them appears to be US president Joe Biden, claim that it diverts money from much-needed reinvestment into lagging industrial sectors.
There is outrage from climate activists and politicians at oil firms lining the pockets of shareholders at a time when a lack of spending on improving production capacity is causing a supply-chain bottleneck, thus causing oil prices to potentially soar above US$100 this year.
In one egregious example, Shell, which earned more profit in 2022 than any other British company in history, deployed US$3.5bn in capital expenditure into renewable technologies, a mere 15% of the cash it deployed into buybacks alone (then there were the dividends on top of that).
Buybacks also divert money away from the clutches of Big Government, which stands to collect handsome taxes should corporations’ cash reserves be redistributed as dividends instead.
Yet for shareholders, they have come as a godsend following one of the worst yearly stock market performances in history.
The benefits of buybacks
For the moment at least, share buybacks are a tax-efficient way of giving back to shareholders.
When a company executes a buyback, it is effectively removing a portion of shares from the free float, thus increasing each shareholder’s piece of the pie, so to speak.
It works well, if Meta’s 20% surge following the share repurchase announcement is anything to go by.
Few have benefitted from buybacks in recent times than Meta chief Mark Zuckerberg, who purportedly owned 13.5% of the company (exact numbers are hard to come by). What is clear is that his net worth has increased by at least US$23bn in 2023 alone
A tax burden will only be realised if a shareholder sells his or her shares and has to pay capital gains.
Dividends, on the other hand, are treated as income. In the UK, the dividend allowance is currently £2,000, after which income tax is applied depending on your tax band.
From April 6, the dividend allowance will be halved, and halved again to £500 in April 2024.
Then again, the capital gains tax-free threshold is due to be halved in April too, so the taxman stands to benefit either way.