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Companies prefer buybacks in wake of Trump tax cuts

Data: Institute of International Finance; Chart: Naema Ahmed/Axios

The gap between corporate buybacks and dividends is the widest it has been in 18 years.

Why it matters: Share buybacks soared, while total dividend payouts remained stagnant in the wake of the 2017 tax cut — at a time when the way companies use their profits to return cash to shareholders is under attack from both sides of the aisle.

  • Companies are opting to buy back stock rather than up dividends for tax reasons. Dividends are taxed as ordinary income, while buybacks are taxed at the lower capital gains rate — according to according to Emre Tiftik and Paul Della Guardia, economists at the International Institute of Finance.
  • Sen. Marco Rubio (R-Fla.) wants to change this. Earlier this year, Rubio said he'll introduce legislation that would make buybacks and dividends taxed on equal footing. There are many questions about how this would work.

Between the lines: Companies' preference for buybacks over dividends also speaks to the lack of confidence that extra profits are here to stay. If they hike dividends now, companies want to be sure they can continue to honor those payouts for years to come.

  • The pace of buybacks has already slowed since the beginning of 2019, IIF said, "as the impact of U.S. tax reform fades."
  • As Axios' Felix Salmon noted last year, it's easier for companies to dial back share buybacks than it is for them to cut their dividend.

Bonus: Last year, companies spent more buying back their own stock than on capital expenditures for the first time since 2008, according to Citigroup.

  • Still, as Bloomberg points out, over the last decade spending on capital expenditures like buildings or new machinery hit $6 trillion, much more than the $5.1 trillion spent on buybacks.

Go deeper: Stock buybacks will be a hot-button 2020 issue

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