Company's buying their own stock was illegal until 1982 when the SEC adopted Rule 10b-18 which created a safe harbor exemption to the anti-market-manipulation rules of the Securities Exchange Act.*
From Investing.com, August 10:
Goldman Sachs expects corporate demand for U.S. equities to outweigh supply this year, even as follow-on equity issuance climbs to its highest level at this point of the calendar year since 2021.
“Follow-on equity issuance is increasing but represents a return to normal rather than a boom,” the bank’s strategists led by Ben Snider said in a note.
U.S. corporates have raised $105 billion via follow-on offerings year-to-date through July, while total equity issuance—including IPOs, follow-ons, converts and SPACs—hit a record $252 billion in the second quarter, surpassing the previous high of $234 billion set in the first quarter of 2021, Goldman noted.
Still, strategists said that both the number of offerings and issuance relative to equity market capitalization remain below long-term averages, with activity concentrated in a handful of large deals.
Financing needs for AI investment are a key driver behind the increase. AI-related issuance has accounted for roughly 40% of U.S. equity follow-on volume this year, and Goldman’s strategists said this trend "will continue to increase going forward."
Consensus estimates imply hyperscaler capital expenditures of $1.1 trillion will exceed operating cash flow by $150 billion in 2027, before turning free-cash-flow positive in 2028. “While recent earnings reports signal upside risk to estimates for hyperscaler revenues, many investors believe capex will register well above consensus forecasts,” the strategists wrote.
*We've looked at Rule 10b-18 a few times but first one of the foundational truths of human creations, March 2024:
"The Purpose Of A System Is What It Does..."
From Forbes Magazine, September 13, 2021:
The Purpose Of A System Is What It Does, Not What It Claims To Do
Stafford Beer, British theorist, consultant, and professor at the Manchester Business School, coined and frequently used the phrase “The purpose of a system is what it does” (POSIWID) to explain that the observed purpose of a system is often at odds with the intentions of those who design, operate, and promote it. For example, applying POSIWID, one might ask if the purpose of an education system is to help children grow into well-rounded individuals, or is it to train them to pass tests? “There is after all,” Beer observed, “no point in claiming that the purpose of a system is to do what it constantly fails to do.”
POSIWID stands above judgement and partisan opinion when considering any system - all one has to do is take note of its actions and outputs. And when those actions and outputs don’t align with what the system claims as its purpose, it jeopardizes the trust, confidence, and loyalty of those who work inside the system and those whom the system purports to serve....
....MUCH MORE
Using this heuristic to look at systems like education or government helps focus on the fact that in a system, as opposed, possibly, to a one-off event, the result is the reality to focus upon.
Reality is not the intentions of the systems designers and the systems implementers and reality is surely not the protestations or explanations, excuses or justifications that surround most human endeavors.
The end result of a system, is what the system is meant to do. For the rest it is hard to put it better than:
"Ils ne se servent de la pensée que pour autoriser leurs injustices,
et emploient les paroles que pour déguiser leurs pensées"—François-Marie Arouet--'Voltaire', Dialogue xiv. Le Chapon et la Poularde (1766)."Men use thought only to justify their wrong doings, and employ speech only to conceal their thoughts"
And on what 10b-18 actually does:
December 31, 2022 - "Share Buybacks and the Contradictions of 'Shareholder Capitalism'” (it's a racket)
I've mentioned SEC Rule 10b-18 a few times, some links after the jump. A lifetime of looking at this stuff has led me to the conclusion that in the U.S. stock buybacks are nothing more than a tax-avoidance scam with the added benefit of rewarding managers for things they didn't do by, well, managing the company rather than the stock price....
(there's an icebreaker for tonight's festivities: "Say, what's your take on SEC Rule 10b-18?")
As we've said over the years, stock buybacks are nothing more than a tax dodge, magically turning cash flows that would otherwise be taxed at ordinary income rates as dividends into higher stock prices due to monotonic and incessant buying pressure from corporations, which cap gains are taxed at much-lower capital gains rates.
The buybacks have an added bonus, at least from management's perspective, of dramatically increasing the value of shares based compensation by using corporate assets—the cash flows that otherwise would be distributed as dividends— to boost a company's stock price, as opposed to the whims of an actual market.
The flaw has two parts, 1) The November 17, 1982 SEC ruling on Rule 10b-18 which opened the floodgates of kleptocratic value extraction of American businesses by giving corporations a safe harbor against charges of stock manipulation when buying their own shares and 2) The smart kids, members of Phi Scamma Jamma, are still pitching a differential between tax on earned income and tax on capital gains even though the efficacy of capital gains tax breaks in performing their original purposes, investment and job creation, has been declining since the 1970's and is now just an excuse for a loophole. See "TAXES, CAPITAL AND JOBS" for an exceptionally lucid discussion, again, if interested.
The new law, and the Administration's proposed increase, are a fig leaf slapped over the naughty bits, designed to give the appearance of doing something while having no discernible real-world effect on behavior....
"The Real Reason Stock Buybacks Are a Problem"
This
argument is a corollary of the fact that the preferential taxation of
capital does not seem to deliver on the policy goals with which it is
rationalized.
More on that after the jump.
(I'm going to get kicked out of the club aren't I?)
Related, the post where I first used the 10b-18 intro: Taibbi: "The S.E.C. Rule That Destroyed The Universe"
And just to refresh memories:
...II. Overview of Current Rule 10b-18
A. Rule 10b-18 as a "Safe Harbor"
In 1982, the Commission adopted Rule 10b-18,4 which provides that an issuer will not be deemed to have violated Sections 9(a)(2) and 10(b) of the Exchange Act, and Rule 10b-5 under the Exchange Act, solely by reason of the manner, timing, price, or volume of its repurchases, if the issuer repurchases its common stock in the market in accordance with the safe harbor conditions.5 Rule 10b-18's safe harbor conditions are designed to minimize the market impact of the issuer's repurchases, thereby allowing the market to establish a security's price based on independent market forces without undue influence by the issuer....
For many, many years corporations have been the marginal buyer, meaning their actions are what sets stock prices, which is directly at odds with the original intent of the rule change.
From the SEC, December 10, 2002, comments on the proposed amendment to 10b-18 which was adopted in 2003.
Proposed Rule
Rule 10b-18 and Purchases of Certain Equity Securities by the Issuer and Others
....At the same time, an issuer has a strong interest in the market performance of its securities. Among other things, its securities may be the consideration in an acquisition, or serve as collateral for financing. The market price also determines the price of offerings of additional securities. Therefore, at various times, the issuer may have an incentive to manipulate the price of its securities. One way to positively affect the price is to purchase the securities in the open market. Because repurchases of its securities could affect the market price of an issuer's stock, this may expose the issuer to claims that the repurchases were made in a manipulative manner even when they were done in a manner not intended to move market prices.
Rule 10b-18 addresses this problem. In 1982, the Commission adopted Rule 10b-18,2 which provides issuers3 with a safe harbor from liability for manipulation under Sections 9(a)(2) and 10(b) of the Exchange Act, and Rule 10b-5 under the Exchange Act, when they repurchase their common stock in the market in accordance with the rule's manner, timing, price, and volume conditions.4 Rule 10b-18's safe harbor conditions are designed to minimize the market impact of the issuer's repurchases, thereby allowing the market to establish a security's price based on independent market forces without undue influence by the issuer.5
