Apple is about to embark on a record-breaking period of share buybacks.
The iPhone maker is going to spend an additional $100 billion over a period of years to buy its own stock, a move that was made possible by tax reform legislation last December.
Many investors like stock buybacks, because they can drive the stock price higher and make earnings-per-share look spectacular. Plus, Apple CEO Tim Cook says it’s good for Apple, because he believes the stock is undervalued. (24 of 34 analysts covering Apple have target prices above the current share price, according to Bloomberg data.)
But Cook also said in a recent interview with Bloomberg that Apple’s record capital return — it’s already spent $200 billion on buybacks since 2012 — is good for the economy, too.
Here’s what he said:
“We’re also going to buy some of our stock because we view our stock as a good value,” Cook said in the interview. “It’s good for the economy as well because if people sell stock they pay taxes on their gains.”
A new argument
Economists from across the political spectrum contacted by Business Insider were unfamiliar with Cook’s argument that the capital gains taxes generated from stock buybacks were good for the economy.
“Buybacks are just not going to be a story about ‘woo-hoo, the government is getting revenue,'” Donald Marron, the director of economic policy initiates at the Urban Institute, said.
“There may be some incremental revenue, don’t get me wrong. If the stock buyback leads to the stock price being higher, then the people who are selling their shares are going to realize larger gains, so there will be some revenue from that,” he continued. It’s just not going to be that substantial.
“To me that’s a ludicrous argument,” William Lazonick, a professor of economics at University of Massachusetts-Lowell told Business Insider, calling the justification “not even a quarter baked.”
“To make that kind of lame argument just shows how bankrupt it is, that he really can’t say that buybacks have any benefit,” he continued.
One irony to Cook’s argument is that stock buybacks were often seen in the 20th century as a way to avoid paying the higher tax rates that affected dividends and other forms of capital return.
“Usually the conventional wisdom is the opposite” of Cook’s position, John Cochrane, senior fellow at the Hoover Institution, said in an email. “Stock buybacks started in the 1990s as a way of helping people to avoid paying taxes.”
“We usually think of paying taxes as a necessary evil — taxes are always bad for the economy, but if the government has something important to do with the money, like national defense, well, then, we all pony up our share,” he continued.
The buybacks debate
There is a lively debate over whether buybacks are good for the economy, but both sides tend to center around whether they are an efficient deployment of money, instead of the amount of tax that may be paid on those buybacks.
“From the economy’s point of view as a whole, the story with buybacks is do they succeed at redeploying capital that’s used in a way that’s more effectively, efficiently, and productively?” Marron said. “The marginal effect on federal revenues is a sideshow compared to that.”
Lazonick argues that “capital return” is often a misnomer, and that buybacks enrich management and short-term activist shareholders such as Carl Icahn, who first pressured Apple to start buying its own stock in 2011.
“Who are you returning money to? This is part of a bigger myth that the stock market funds companies. It doesn’t It’s a way we as households, as savers, put our money in various places. We get money out of companies, we don’t put money into the economy, in general, through the stock market,” he said, pointing out that the only time Apple raised funds from the public market was during its IPO in 1980.
“Apple has a history, when Steve Jobs was pushed out in 1985, it became one of the most shareholder value-oriented companies in Silicon Valley, with high pay, buybacks, and dividends. It almost drove the company into bankruptcy,” he continued.
Cochrane, the Hoover Institute economist, did not address capital gains in a Wall Street Journal op-ed from March titled “Stock Buybacks Are Proof of Tax Reform’s Success.”
He wrote:
“The debate over whether companies will spend higher revenues on wages or buybacks misses the whole point. The economic argument for the corporate tax cut is that companies with good ideas, projecting a better after-tax return on new capital investments, will make such investments. This new investment will let companies expand and make their workers more productive. When that happens, companies will compete for workers, leading to higher wages. Not all companies should make new investments, and some of the best investments come from new companies that don’t have profits yet.”
As arguments for buybacks go, that’s one of the stronger ones from a free-markets perspective, the same point of view Apple CEO Tim Cook has often espoused.
It will be interesting to see if Apple and Cook continue to say that buybacks are good for the economy. Apple spends a lot of time making the case that its various investments are good for the economy, such as its rumored new campus. Apple declined to comment on the thinking or research behind Cook’s remarks.
But Apple is only spending as much as $2 billion in its new campus, according to a report on Thursday. As its cash position winds down to nothing, it will have spent as much as $300 billion on buybacks this decade.
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