US tech firms’ buybacks hit record $387bn

Bloomberg

Some of the largest US technology companies pushed for a corporate tax overhaul in 2017 by suggesting they would go on hiring sprees and boost the economy. Just over a year after getting what they wanted, data show these firms gave most of their huge tax savings to investors.
The top 10 US tech companies spent more than $169 billion purchasing their shares in 2018, a 55 percent jump from the year before the tax changes, according to data compiled by Bloomberg. The industry as a whole authorised the greatest number of share buybacks ever recorded, totaling $387 billion, according to TrimTabs Investment Research. That’s more than triple the amount in 2017.
Spending on research and development climbed slightly. Capital expenditures rose because Alphabet Inc. and Facebook Inc. almost doubled spending in that category. Apple Inc. and its partners have yet to bring manufacturing back to the US, as President Donald Trump had hoped. And there was no surge in tech hiring, according to data compiled by Bloomberg.
“The companies making these hiring promises don’t have any signed agreement with any government on any level,’’ said Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, a think tank that has criticised the new law. “They’re just promises. They’re going to be pretty loose and unenforceable, and they want them to be that way.’’
Buying back stock improves a company’s earnings per share and increases the value of the holdings of shareholders, including insiders. But stock repurchases aren’t so great for the economy when compared with other potential uses of
that money, including hiring more workers.
The US has given up hundreds of billions of dollars in corporate tax revenue for the promise of other benefits. A year in, the results don’t show much of a payoff. Buybacks are already being targeted by some politicians. US Senator Chris Van Hollen, a Democrat from Maryland, threatened to introduce legislation that would make it more difficult for executives to sell stock right after their companies announce they’ll repurchase shares. Senator Marco Rubio, a Republican from Florida, said he wants to crack down on the tax benefits companies get from buybacks.
“Buybacks are one factor driving economic inequality in the US, as top corporate executives tend to benefit disproportionately from them,’’ David Santschi, director of liquidity research at TrimTabs, wrote in a recent report.
Trump signed Tax Cuts and Jobs Act into law in the final days of 2017. It cut the corporate tax rate to 21 percent from 35 percent. And for profits held overseas, there was a special rate of 15.5 percent on cash and 8 percent on non-liquid assets, meant to encourage companies to bring the money back to the US Once back, the theory went, the companies would invest it domestically, boosting the economy.
US companies ended up saving 30 percent in tax expenses overall in 2018, according to ITEP. Tech companies were the main beneficiaries of the cash repatriation provision. Before the law, the largest overseas cash hoards among US companies were held by Apple, Microsoft Corp., Cisco Systems Inc., Oracle Corp. and Alphabet.
While it’s still too soon to measure the full consequences of the law, there are signs it will miss the stated goals. Trump said it would bring $4 trillion in overseas cash back to the US Corporate America repatriated $665 billion in 2018, according to the Commerce Department. Tech sector buybacks ate up more than half of that. Trump said the corporate tax cuts would spur so much economic activity that they would pay for themselves. But economic growth hasn’t improved: 2.3 percent year-over-year growth in the final quarter of 2017 versus 2.2 percent in the last three months of 2018.
Bloomberg analysed 2018 spending by 10 of the largest US tech companies: Alphabet, Amazon.com Inc., Apple, Cisco, Facebook, Intel Corp., International Business Machines Corp., Microsoft, Oracle and Qualcomm Inc. The study looked at six common uses of corporate cash: buybacks, dividends, hiring, acquisitions, capital expenditures and research and development. The 2018 statistics were compared with previous years.
Apple, Microsoft, Cisco, Oracle and Qualcomm have fiscal years that don’t follow calendar years. They haven’t yet disclosed employee numbers for the end of 2018. For the remaining companies, worker ranks grew 8.7 percent in 2018, versus 24 percent the year before.
These are global numbers, too. So it’s unclear how many of these jobs were created in the US. Gardner, from ITEP, said tech companies may not be hiring as many workers as they are seeking because of the difficulty in finding people who have the right skills for technical jobs.
Other measures of tech job growth tell a similar story. Information technology employment in the US grew 2.6 percent in 2018, versus 4.4 percent a year earlier, according to government data compiled by CompTIA, a tech industry trade group.
Research and development spending by the 10 tech companies studied by Bloomberg rose 17 percent last year — a slight uptick from the 15 percent increase in 2017. The acceleration was largely driven by Alphabet and Amazon, which have invested heavily in cloud computing.
Capital expenditures surged in 2018 as Alphabet and Facebook nearly doubled this type of spending, which includes computers for their huge data centers, and Intel boosted its capital expenditures 29 percent. A chunk of Intel’s increased spending went to re-equip a memory chip plant in China. That helped bump the companies’ overall metric to
40 percent growth, from 23 percent the year before.
After swelling in 2017, the amount of cash tech giants used for mergers and acquisitions collapsed in 2018.
Tech giants spent a combined $50 billion on dividends last year. Dividend growth was one percentage point higher than the previous year, but smaller than the acceleration in 2016. Those 10 tech companies spent more than $169 billion on buybacks last year, up from $109 billion in 2017. The final number will rise as some of the
companies with off-year fiscal calendars disclose more information about their repurchases.