The proposed 1% excise tax on buybacks would reduce earnings per share by about 0.5%. That is not a big hit, but it's reasonable to ask if this would change the behavior of those corporations. "I do not see the 1% tax inhibiting corporate buybacks, or dividends," Howard Silverblatt at S & P Dow Jones Indices told me.

The 1% tax will likely cause some companies to rethink how to best return excess cash to shareholders. In the near term, this may push buybacks even further into record territory. A very small number of companies account for most of the buybacks, and the ocean of profits generated in 2021 has led to a large increase.

In the last 12 months ending in June, corporate buybacks have been strong. This is almost twice the $547 billion corporations returned to shareholders as dividends. Most of the activity is concentrated in a small group of "buyback monsters" For example, five companies account for about a quarter of the dollar value of all stock bought back.

Corporations have been favoring returning money to shareholders via buybacks over dividends for several years. The main reason: Buybacks are more flexible. If they raise dividends and then reduce the dividend, shareholders will complain. Any shift to dividends over buybacks would create a delicate "balancing act"

Investors get spooked when dividends are cut or are not increased as expected. Many companies shift their quarterly buyback spend in a way that wouldn't be tolerated with dividends. So for companies that shift more cash to dividends they're going to need to be careful about how aggressive they are.
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