Stocking Up

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What's going on?

Theres been a stock bonanza for investors, with companies paying out over $1 trillion to shareholders over the past twelve months (tweet this) but some are wondering if that money could be put to better use.

What does this mean?

Following recent corporate tax reform in the US which lowered the tax burden on large corporations and allowed them to bring any overseas cash they had into the US at relatively low tax rates companies have been taking that extra dough and giving it back in record amounts to their shareholders through dividends and share buybacks (when companies buy back stock from their investors).



However, theres some concern that companies are more concerned about rewarding investors with the money freed up by the tax cuts than plowing that money back into their businesses which economists believe could help address long-term economic problems like low productivity.

Why should I care?

The bigger picture: Now could be a good time to invest back into companies.


Since lots of people are working (US unemployment is low), itll probably cost more to employ new people (since companies may have to offer higher wages to get people to leave their current jobs) and more labor might not be that useful to well-staffed businesses. So it may make sense to spend money on equipment and tools, which could help the existing workforce to become more skilled and productive.



For markets: Theres a reason for all these shareholder payouts.


With current low interest rates, some assets like government bonds are paying lower returns than they used to when interest rates were higher. This means that some investors are clamoring for stock dividends and buybacks as a way to replace and even boost their returns. However, as interest rates start to rise in places like the US, companies may choose to pay back some of their debts rather than their investors, slowing the pace of buybacks and dividends.

Originally posted as part of the Finimize daily email.

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