New Buyback Tax May Impact Stock Returns

Insights | New Buyback Tax May Impact Stock Returns

Author: David I. Templeton, CFA, Principal and Portfolio Manager

In August of last year Congress passed the so-called Inflation Reduction Act and included within the Act is a 1% excise tax on the fair market value of stock repurchased by companies effective 1/1/2023. On December 27 the IRS released initial guidance on the tax in Notice 2023-2. The excise tax does not apply to repurchases under $1 million, so many companies that repurchase stock will be impacted by this tax. Further detail can be found in a Grant Thorton summary at this link. At issue for investors, in addition to the impact on individual companies, is some investment strategies are constructed around a buyback variable. More specifically, Invesco has constructed an index known as the BuyBack Achievers ETF (PKW.) According to the Invesco site,

"The Invesco BuyBack Achievers ETF (Fund) is based on the NASDAQ US BuyBack Achievers Index (Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is designed to track the performance of companies that meet the requirements to be classified as BuyBack Achievers. The NASDAQ US BuyBack Achievers Index is comprised of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 month."

Over the long run the Invesco BuyBack Index has outperformed the S&P 500 Index as seen in the below chart.

BuyBack Index versus S&P 50 0Index Performance

More recently though the BuyBack Index seems to be underperforming, especially since the beginning of 2023.

Buyback Index versus S&P 500 Index short term chart

The short-term underperformance is just that, short term, and does not necessarily indicate a longer stretch of weakness. However, given the additional tax that will impact companies, the issue is worth incorporating into one's analysis.

HORAN Capital Advisors, LLC is an SEC registered investment advisor. The information herein has been obtained from sources believed to be reliable but we cannot assure its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results. Market conditions can vary widely over time and there is always the potential of losing money when investing in securities. HCA and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.