Why Stock Buybacks Could Accelerate in Q4

A new tax on stock buybacks is set to go into effect in 2023, leading many companies to announce accelerated share repurchase plans in the fourth quarter.

stack of hundred-dollar bills for stock buybacks
(Image credit: Getty Images)

Whether you are for or against them, stock buybacks could accelerate as the end of the year nears. This is because the Biden administration's excise tax on share repurchases – introduced as part of the Inflation Reduction Act (IRA) signed into law in mid-August – is set to go into effect at the start of 2023. 

When a company buys back their stock, it removes the shares from the marketplace, which in turn, can boost earnings per share and the per-share price – maximizing shareholder value. Beginning Jan. 1, public companies based in the U.S. must pay a 1% tax on their share repurchases, no matter the size. At the same time, the IRA implemented a 15% alternative minimum tax (AMT) on corporations with book income over $1 billion.

But, as with most things, there are exceptions to the rule. For one, if a company repurchases stock and then commits an equal value in a single year to the company's employee pension plan, employee stock ownership plan or similar plan, they are exempt from the 1% tax, says Los Angeles-based global law firm Latham & Watkins.

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Still, even with the exceptions, Latham & Watkins suggests that companies should "give careful consideration to the timing of stock buybacks and stock issuances." Based on market and business conditions, the law firm writes in its report (opens in new tab), some corporations "may decide to accelerate planned 2023 buybacks to 2022."

3 Companies Already Unveiling Stock Buybacks

There is already evidence that some companies are shifting their stock repurchases to occur by the end of 2022 versus at some point next year.

Department store chain Kohl's (KSS (opens in new tab)), for instance, announced on Aug. 18 – two days after the IRA was signed into law – that it had entered into an accelerated share repurchase (ASR) agreement with Goldman Sachs. The ASR is for $500 million, with the final settlement in November, well before the Dec. 31 deadline to avoid the 1% tax.

Defense contractor Lockheed Martin (LMT (opens in new tab), $446.54) is another company that recently announced an accelerated stock buyback program. LMT did so after unveiling its Q3 2022 financial results on Oct. 18. They were good, with the firm beating on the bottom line and maintaining its full-year guidance.

Additionally, as part of its earnings announcement, Lockheed said it would execute a $4-billion ASR before the end of the year, doubling its share repurchases in 2022 to $8 billion. At the same time, the company's board agreed to an additional $14 billion in share repurchases over the next three years.

LMT will save $40 million in taxes through the ASR. However, the $14 billion share repurchases planned over the next 36 months will cost it $140 million in additional taxes thanks to the IRA.

On the same day as Lockheed Martin, State Street (STT (opens in new tab), $66.64) announced it would repurchase $1 billion of its stock in the fourth quarter. While not specifically an ASR, it is considerably larger than anything it's done in some time.

STT's plan to buy back $1 billion in stock by the end of 2022 is part of a larger $3 billion share repurchase program announced in July 2021. It did not make any share repurchases between Q3 2021 and Q3 2022. Assuming it only repurchases $1 billion of its stock in the fourth quarter, the company will have a $20 million tax bill on the $2 billion it didn't complete from its original program.

These three companies are hardly alone. And it's possible we could see even more firms announce accelerated stock buybacks as they scramble to save a few million in taxes before the new calendar year begins.

Will Ashworth
Contributing Writer, Kiplinger.com

Will has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he's a keen student of business history. Married and now living in Halifax, Nova Scotia, he's also got an interest in equity and debt crowdfunding.