The CHIPS Act reawakens the buyback bogeyman: Morning Brief

Julie Hyman
·Host
Updated 5 min read
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Tuesday, February 28, 2023

Today's newsletter is by Julie Hyman, anchor and correspondent at Yahoo Finance. Follow Julie on Twitter @juleshyman. Read this and more market news on the go with the Yahoo Finance App.

Today the process opens for semiconductor companies to apply for a piece of the $39 billion grant money being allocated as part of the CHIPS and Science Act.

But there's a catch: firms that win the funds may not be able to buy back stock – for a while, anyway.

“We want to make sure that their money is being used to increase research and development in innovation and not to pad their bottom line or do buybacks,” said Commerce Secretary Gina Raimondo in an interview with Yahoo Finance.

One could argue it’s the administration’s prerogative to decide how chipmakers that accept grants to build factories use that money.

But the White House wants to go further, by boosting taxes on buybacks from their current 1%. In his State of the Union address earlier this month, President Joe Biden said that tax should be much higher: "Corporations ought to do the right thing. That’s why I propose we quadruple the tax on corporate stock buybacks and encourage long-term investments. They’ll still make considerable profit."

U.S. President Joe Biden attends the groundbreaking of the new Intel semiconductor manufacturing facility in New Albany, Ohio, U.S., September 9, 2022. REUTERS/Joshua Roberts
U.S. President Joe Biden attends the groundbreaking of the new Intel semiconductor manufacturing facility in New Albany, Ohio, U.S., September 9, 2022. REUTERS/Joshua Roberts (Joshua Roberts / reuters)

That proposal is what may have led Warren Buffett to weigh in on the hot-button issue in the Berkshire Hathaway CEO’s annual letter to investors: “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”

Even Buffett has a caveat, however: he says buybacks make sense only if they are made at “value-accretive prices,” i.e. when corporations don’t overpay.

Taking a step back, corporations have a number of ways to spend their money, from building new plants to hiring people to research and development. They can also distribute the funds directly to shareholders by paying out dividends.

Or they can repurchase shares, which has the effect of reducing overall share count, automatically increasing earnings per share. (In a simplified example, if a company makes $1 million in profit and has 50,000 shares outstanding, earnings per share are $20. If it buys back 10,000 of its shares, earnings per share go to $25, making an existing shareholder's stake more valuable.)

And the numbers are a lot bigger than in the example above. Last year, U.S. companies announced a record $1.223 trillion of buybacks, according to data from EPFR TrimTabs. This year, it’s already running at $274.9 billion — heating up even after the 1% tax kicked in.

Eliminating or restricting that tool, then, would be a big deal. Will it actually happen?

In the case of companies accepting money as part of the CHIPS Act, it’s unclear whether they’ll be barred from doing buybacks at all, or just directly using the funding they’ve received. (Senator Elizabeth Warren and some of her colleagues in Congress want the participants to be barred from doing buybacks for 10 years).

Secretary Raimondo said each case will be different, but the government will in theory have the ability to claw back money in the “most extreme cases” if companies do not comply with their agreements, whether that deals with buybacks or other stipulations.

Investors in companies like Intel (INTC) and Taiwan Semiconductor (TSM) should take note, since they’re among the firms that have announced plans to build plants in the U.S. and are likely to apply for federal funding.

As for whether a broader clampdown on buybacks is coming, policy analyst Ed Mills is skeptical.

“Really, what this is about is setting up a strawman, as we get into debates about the debt ceiling,” Mills, a managing director at Raymond James, told Yahoo Finance in an interview.

On the one hand, Republicans will fire up their rhetoric about getting the U.S. fiscal house in order. Democrats, led by President Biden, are likely to shoot back by saying Republicans aren’t willing to ask companies enacting big buybacks to pay more in taxes.

“I don't think it happens, but I think it's going to be more part of the conversation than I think the market anticipates right now,” Mills said.

What to Watch Today

Economy

  • Advance Goods Trade Balance, January (-$91.0 billion expected, -$90.3 billion during prior month, revised to -$89.7 billion)

  • Wholesale Inventories, month-over-month, January Preliminary (0.1% expected, 0.1% during previous month)

  • Retail Inventories, month-over-month, January (0.5% during prior month)

  • House Price Purchase Index, quarter-over-quarter, Q4 (0.1% during prior quarter)

  • FHFA Housing Pricing Index, December (-0.1% during prior month)

  • S&P CoreLogic Case-Shiller 20-City Composite, month-over-month, December (-0.54% during prior month)

  • S&P CoreLogic Case-Shiller 20-City Composite, year-over-year, December (6.77% during prior month)

  • S&P CoreLogic Case-Shiller U.S. National Home Price Index, year-over-year, December (7.69% during prior month)

  • MNI Chicago PMI, February (44.3 during prior month); Richmond Fed Manufacturing Index, February (-11 during prior month)

  • Conference Board Consumer Confidence, February (108.5 expected, 107.1 during prior month)

  • Richmond Fed Business Conditions, February (-10 during prior month)

  • Dallas Fed Services Activity, February (-15.0 during prior month)

Earnings

  • AMC Entertainment (AMC), AutoZone (AZO), Cracker Barrel (CBRL), Compass (COMP), Duolingo (DUOL), GoodRx (GDRX), HP (HP), J.M. Smucker (SJM), Manchester United (MANU), Monster Beverage (MNST), Norwegian Cruise Line (NCLH), Rivian Automotive (RIVN), Ross Stores (ROST), SeaWorld Entertainment (SEAS), Urban Outfitters (URBN), Virgin Galactic (SPCE), Warby Parker (WRBY)

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