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Biden Proposed Stock Buyback Restrictions. What Advisors Need to Know.

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This year has seen plenty of high-profile announcements of stock buybacks.


Amazon

 enacted a $10 billion repurchase program while


General Electric

set its own at $3 billion. Later,


Alibaba

announced that it increased its buyback program from $15 billion to $25 billion.

U.S. President Joe Biden.

Yuri Gripas/Abaca/Bloomberg

According to analysts at Goldman Sachs, the purchases could hit $1 trillion this year, up 12% from 2021’s levels. Through February of this year, S&P companies had announced plans for $238 billion.  

But the Biden Administration does not appear to be a fan. The fiscal 2023 budget released this week includes a proposed plan that could limit buybacks.  

What might this mean for executive clients? What about the impact on the markets?

Let’s take a look:

What is the proposal? The budget document says the president supports legislation having executives “hold on to company shares that they receive for several years after receiving them, and prohibiting them from selling shares in the years after a stock buyback.”

That document doesn’t define “executive” or what it means to “receive” shares. 

But it makes clear the rationale for the proposed limits, saying: “This would discourage corporations from using profits to repurchase stock and enrich executives, rather than investing in long-term growth and innovation.”

What is the potential impact? More companies could forgo buybacks and instead pay higher dividends or special dividends, developments that would have implications for client portfolios. But the holding requirement for shares—regardless of a buyback—could have an impact on executive compensation.  

“The restriction may result in a shift toward higher salaries and benefits, which also rankles populist policymakers,” said Peter C. Earle, an economist at the American Institute for Economic Research.

What are the pros and cons of buybacks? Buybacks reduce the number of shares outstanding, which increases the earnings per share. This can help increase the stock price. The announcement of a buyback could also signal that management is confident in its prospects and the shares are undervalued.  

But there are downsides. Data from Fitch Ratings—since 2007—show that companies used anywhere from 60% to 120% of their free cash flow for buybacks. Companies that relied on borrowing to pay for their buybacks could see their credit get downgraded, Fitch warned.

What are the chances the buyback legislation will be enacted? It could be tough. Conservative Democrats, like Senators Joe Manchin and Kyrsten Sinema, may be resistant to imposing regulations on Corporate America. Last year, Democrats proposed a 1% corporate tax on share repurchases as part of the Build Back Better plan, and it failed to get enough votes.

“I think the economic costs of the proposal would be considerable and the likely revenue limited because of the types of changes in behavior,” said Chester Spatt, a professor of finance at Carnegie Mellon University’s Tepper School of Business. “Companies may become reluctant to raise capital because of complications in returning it to shareholders, make inefficient investment choices that hurt our economy and discourage incentive compensation to executives.”

Write to advisor.editors@barrons.com

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