Imagine yourself as the CEO of a large publicly traded company. You want your shares to rise, both to satisfy shareholders and to justify a big bonus. One option is to invest your profits in developing new products, building factories or opening stores, but it is difficult to increase your stock price this way. It is much easier for the company to buy its own shares. Stock buybacks, as they are called, have become the largest source of demand for U.S. stocks and topped $1 trillion for the first time in 2022. But their future is more uncertain now that Congress has passed a law that will impose a tax on redemptions. One consequence could be an increase in dividends, the payments companies pay directly to shareholders.
The last few years have been among the the busiest on record, according to the S&P Dow Jones indices. S&P 500 companies, flush with cash thanks to a 2017 tax cut, repurchased $806 billion in shares in 2018, setting a record at the time. While redemptions fell in 2019 and 2020, they set a new record of $882 billion in 2021 before reaching $1.26 trillion in 2022. In January, $132 billion in planned redemptions were announced, more than triple the level of the previous year. For index members, redemptions have exceeded dividends in all but two quarters since 2010.
