This year’s Wall Street Journal CEO Council Meeting was held from November 13th to 14th. At the meeting, which included discussions of critical issues such as artificial intelligence, cyber security and foreign markets, Gary Cohn, the White House economic advisor, asked the CEOs in attendance whether they believed the proposed reduction in taxes would encourage them to spend more. In response, few CEOs answered in the affirmative. This response is likely representative of the fact that the existing tax rates have not deterred companies from investing. In fact, companies are spending more than before. So far, in this year alone, capital spending on equipment has increased at a 7.3% annual rate, which is a record rate in the past three years.
Increase in spending, decrease in buybacks
It has been reported that the main reason companies are spending more is due to greater demand. In order to keep up with demand and not lose their market share to competitors, companies have been compelled to spend more on labour, capital and mergers and acquisitions. In turn, large American companies have been spending less money on stock buybacks. This reallocation in spending is a marked change. For instance, the rate at which large companies are rebuying their stock is the slowest it has been in five years. This year, companies in the S&P 500 are expected to spend $125 million per quarter on buybacks, as opposed to the average from 2014 to 2016, which was $142 billion per quarter. A more specific example can be taken from Apple’s spending pattern. Apple has the largest buyback program out of all the companies in the S&P 500, yet it decreased its spending on buybacks, as well. In Q4 2015, Apple repurchased $10.9 billion worth of its own shares, but spent $7.2 billion in Q1 2017.
While Goldman Sachs predicts that the rate of buybacks will increase slightly by 3% to $510 billion in 2018, it also believes that changes to the tax legislation could result in companies pulling away from buybacks even further. Given the potential tax reform and other political and economic factors that could influence corporate spending patterns, it will be interesting to see which way the trend of spending on buybacks will go.
The author would like to thank Monica Wong, Articling Student, for her assistance in preparing this legal update.
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