U.S. S&P 500 companies’ treasury stock purchases in the third quarter reached an all-time high. While U.S. companies’ treasury stock purchases have led the U.S. stock market to an upward rally this year, some, including U.S. politicians, have also criticized the use of cash held by companies for treasury stock purchases, not investments.
According to the Wall Street Journal, S&P 500 companies’ treasury stock purchases in the third quarter reached a record high of $234.5 billion. This is above the previous high of $223 billion in the fourth quarter of 2018.
In the fourth quarter, the highest amount in history of companies’ treasury stock purchases is expected to be renewed again. S&P 500 companies’ treasury stock purchases reached $236 billion in the fourth quarter, breaking another record high, said Howard Silverblatt, an analyst at S&P Dow Jones.
In fact, the amount of treasury stock purchases by U.S. S&P 500 companies decreased slightly in the second quarter of last year in the aftermath of COVID-19. Since then, it has turned to an increasing trend. It fell from $19 billion in the first quarter of 2020 to $89 billion in the second quarter and has since increased to $19 billion in the second quarter of 2021.
Earlier in September, Microsoft (MS) approved a 60 billion won treasury stock purchase plan. Hertz, a global rental car company, also recently announced a $2 billion treasury stock purchase plan. Dell Technology, an information and communication (IT) company, is also reportedly planning a $5 billion treasury stock purchase program.
Wall Street cited companies’ treasury stock purchases as one of the factors that led to this year’s U.S. stock market rally. This is because treasury stock purchases lead to a decrease in the number of distributed stocks, leading to a stock price boost, and companies’ treasury stock purchases are interpreted as management’s confidence signal in the market, which improves investor sentiment. This year, the S&P 500 index rose 25%, breaking the previous record high more than 60 times.
Some criticize companies for using cash held by them to purchase treasury stocks, not investments. For this reason, a bill that imposes taxes on treasury stock purchases by applying a 1% tax rate is currently pending in the Senate.
Bank of America (BoA) expects pre-tax profits of S&P 500 companies to decrease by 0.3 percent if taxes are imposed on treasury stock purchases. Olivier Safati, an analyst at asset management company Gentrust, analyzed, “Even if the bill is implemented, it will not have a significant impact due to the low tax rate applied to treasury stock purchases.”
