1% tax on stock buybacks under Inflation Reduction Act seen as a boon for large companies

A record last year of almost $1.2 trillion has been reached by companies this year, according to a tally from EPFR, which has already announced another $800 billion deluge of planned stock buybacks this year.

That is a bigger batch than most years in the past decade, see chart with the 1% tax on share buybacks under the Inflation Reduction Act viewed as not going to dull the appeal of share repurchases by many large companies.

George Catrambone, head of Americas trading at DWS Group said that this isn't the first time an excise tax on buybacks has been proposed. He said that he would expect a 1% buyback tax to be small, particularly with high cash on company balance sheets making buybacks an appealing alternative to dividends and capital expenditures, because they offer more flexibility and aren't multi-year commitments. An earlier version of the bill, known as Build Back Better, which didn't pass in 2021, proposed a 2% tax on buybacks.

The Inflation Reduction Act also contains a 15% minimum tax for large companies, which aims to bring dozens of Fortune 500 companies paying little or nothing in income tax back into the fold.

Goldman Sachs analysts said both provisions pose a modest downside risk, while they estimate that they would lower S&P 500 index SPX, earnings per share by roughly 1% in 2023, with smaller declines in the low effective tax rate sectors of healthcare and information technology.

Earnings per share indicate a willingness by investors to pay more for stock based on its profit outlook.

What is the bill and how it will affect your portfolio, read: An investor's guide to the Inflation Reduction Act.

The House of Representatives voted to approve the measure after it was passed by the Senate. It will be sent to President Joe Biden to sign shortly after.

A proposal from the U.S. Securities and Exchange Commission could add enhanced rules around how companies can execute share repurchases and require more detailed disclosures, which could be a bigger concern for American Companies, Catrambone said.

The SEC proposal says issuers are not required to disclose the specific dates on which they will execute trades, so it aims to give investors more insight into when an issuer or related party plans to buyback shares.

U.S. stocks rallied Friday, with the S&P 500, Dow Jones Industrial Average DJIA, and Nasdaq Composite Index COMP heading for weekly gains of about 2.8% to 3.1%, according to FactSet.