Big U.S. companies brought $300 billion in overseas cash back into the United States during the first quarter of 2018, taking advantage of lower corporate tax rates that were passed into law by Republicans in December, according to a report by three Federal Reserve economists.
The first three months of the year showed a dramatic rise in buybacks, compared with the previous quarter, the report said.
Buybacks have come under criticism, particularly from Democrats, who argue that the money from the corporate tax cuts could be used more productively by hiring workers, boosting wages, building factories and buying equipment.
“This confirms precisely what many of us expected from the tax cut, despite the fact that the cut’s proponents argued otherwise,” said Jared Bernstein, who served as economic adviser to Vice President Joe Biden. “I argued that we’d see a surge in buybacks before we saw a surge in investment. That’s been demonstrably the case.”
The study released Sept. 4 estimates that U.S. companies had $1 trillion in cash abroad at the end of last year, mostly in U.S. fixed-income securities. The report used publicly available information from regulatory filings and other data to establish the $55 billion in buybacks. The report did not identify any of the companies.
The analysis by the Fed economists covers only the top 15 U.S. nonfinancial firms, which account for about 80 percent of total offshore cash holdings, according to the report.
The analysis said the top five companies in the study accounted for 66 percent of the buybacks. The biggest company alone accounted for 41 percent of the stock repurchases in the first quarter. The study found that dividends paid by the top 15 companies were little changed compared with a year earlier.
The report left open the question of how much money the companies were investing.
“Evidence of an increase in investment is less clear at this stage, as it is likely too early to detect, given that the effects may take time to materialize,” according to the study.
Douglas Holtz-Eakin, president of the American Action Forum, said the big companies with massive overseas holdings are likely sitting on the money until they figure out the rules governing the corporate tax cuts. “These are the large global companies with overseas money,” he said. “They are the ones for whom the rules are not written on the tax cut.”
Holtz-Eakin said the repatriation is exactly what is supposed to happen. “Suppose we did all this and the money didn’t come back,” he said. “That’s a failure.”
Corporations have been making huge profits, accumulating cash not just overseas but also in the United States. At the end of 2017, companies in the Standard & Poor’s 500-stock index were sitting on the largest cash pile in history: nearly $1.8 trillion in cash and equivalents, according to Howard Silverblatt, a senior index analyst with S&P Dow Jones Indices.
Even investor Warren Buffett has endorsed buybacks. The Berskhire Hathaway chairman said in a CNBC interview last month that the company has bought back some of its shares, but he did not disclose an amount.
America’s 500 biggest companies are expected to distribute up to $600 billion or more this year through buybacks, a big increase over past years.
Holtz-Eakin defended buybacks as an effective vehicle for putting idle corporate money to productive use by recirculating it into other parts of the economy. “You want to get the money out of the firm that has no use for it and into something useful,” he said.
Bernstein said it’s too early to say whether all the repatriated money will go toward buybacks.
To be fair, “these are still very early days for investment impacts from the cuts. We can’t possibly make anything like a final judgment,” Bernstein said. “I debated advocates of the tax cuts who said the cuts would not flow into buybacks to juice stock prices. So far they have been wrong.”