Share Buybacks Could Hurt Corporate Cash Flows

A recent wave of stock buybacks by large U.S. companies is likely to prompt shareholders to expect more in future years, possibly impeding a company’s ability to pay down its debts, according to a report by Moody’s Investors Service Inc.

Multinationals pivoted in the second half of last year to using cash freed up by the 2017 tax-code overhaul for share repurchases, instead of paying down debt, which they had done for the first six months of the year.

The shift away from “credit-positive activities such as debt reduction” toward returning cash to shareholders through share repurchases suggests that the benefits of President Donald Trump’s tax law “may be losing steam,” said the report, issued Tuesday. That’s in part because loading up on debt can impede a company’s cash flow and ability to repurchase shares just as investors demand more of that.

The report provided new data to show that companies have pivoted to using tax reform primarily to reward shareholders, rather than to pay down debt and ramp up capital spending and outlays on research and development. Among the 100 companies included in the report are Amazon.com Inc., Exxon Mobil Corp., Intel Corp., Microsoft Corp., Pfizer Inc., and Walmart Inc.

In the second half of last year, companies spent $114 billion on stock buybacks, compared with $38 billion on capital expenditures and $28 billion to pay down debt. In contrast, over the first half of last year, companies spent $71 billion on stock buybacks, $47 billion on capital expenditures and $72 billion paying down debt, Moody’s said.

“If incremental spending on share repurchases for 2019 and beyond approaches even a fraction of the incremental spending in 2018, this would neutralize any cash flow benefits that companies will receive from the credit-positive aspects of the TCJA,” referring to the law, the Tax Cuts and Jobs Act.

If the recent shift to share buybacks does in fact create expectations of more of the same, it “would overshadow future tax overhaul cash flow benefits for our sample group,” Moody’s wrote.

The 2017 law cut rates for businesses and individuals and required companies to pay “repatriation” taxes on untaxed profits stored offshore. Companies had kept an estimated $1.5 trillion to $2.5 trillion of such profits offshore because the 35 percent corporate tax kicked in only if they were brought back to the U.S. The new law set a one-time 15.5 percent tax rate on cash and 8 percent on non-cash assets, regardless of where the profits sat. It also lowered the corporate rate to 21 percent.

Corporate America brought $664.9 billion of offshore profits back to the U.S. last year, according to recent Commerce Department data. That’s short of the $4 trillion that Trump said would come back as a result of the new law.

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