Despite the Dow Jones plunging by as much as 1,500 points Monday, Wall Street is rebounding. But there’s a simple explanation for that quick recovery.
Corporate executives have long since been deploying stock buybacks as a strategy for reaping larger dividends on the options they own. Shortly after the George W. Bush administration signed a tax repatriation bill into law in 2005 that allowed corporations to bring money stashed in overseas tax havens back to the U.S., corporations used the money to buy up company stock (and simultaneously fire thousands of workers), driving up the price of shares.
Pfizer, for example, repatriated more than $36 billion and announced a multibillion-dollar stock buyback, and PepsiCo did the same. Last year, Walmart announced plans to invest $20 billion in buying up its own stock for the purposes of providing higher dividends to shareholders. This is partially the reason for Wall Street’s explosive growth in the last year. And given stocks’ tumble in February, corporations are likely ramping up stock buybacks as a way to keep investors from panicking and selling off their stocks before a more serious crash — especially since that’s what they said they would do during the debate surrounding the Republican tax plan.
Last November, Bloomberg reported on Fortune 500 companies’ plans to use the money gained from the tax cut not for capital investment, but for higher dividends on Wall Street.
“We’ll be able to get much more aggressive on the share buyback,” Kelly Kramer, CFO of tech giant Cisco, told Bloomberg regarding the tax bill.
“[Amgen is] actively returning capital in the form of growing dividend and buyback and I’d expect us to continue that,” Amgen CEO Robert Bradway said in an answer to a question about the tax bill from an investor in October.
Several months prior to the Bloomberg report, the Washington Post reported on a Bank of America/Merrill Lynch survey of several hundred top executives at major corporations regarding the possibility of savings from a future corporate tax cut. When asked how they would spend the extra money gained, the top two answers were paying down corporate debt and buying up their own stock, respectively.
While the reason for the Dow Jones’ volatility can be chalked up to a number of reasons, stock buybacks are almost certainly playing a role in the recent rebound financial markets have seen following several abysmal days of trading in early February.
Matthew P. Robbins is a freelance economics contributor covering wages, budgets, and taxes. He lives in Chicago, Illinois with his husband and two cats.