Cancellation of stock repurchases by U.S. companies

Stock repurchase and cancellation by U.S. companies: a double-edged sword of capital operation, which not only enhances shareholder value but also causes market controversy.

Analysis of the mechanism of stock repurchase and cancellation

Stock repurchase refers to the use of self-owned funds or debt by listed companies.Financial financing involves repurchasing issued shares from the open market or from shareholders. This action directly reduces the number of circulating shares, while cancellation permanently eliminates these repurchased shares and no longer participates in subsequent circulation. From an accounting perspective, repurchase and cancellation will simultaneously reduce cash on the asset side and share capital on the equity side, but will not affect the company's net profit indicators.

The U.S. market particularly favors this method of capital operation because it can quickly increase earnings per share (EPS). When the number of outstanding shares decreases, even if net profit remains unchanged, EPS will automatically rise. This "denominator effect" makes buybacks a more flexible shareholder return tool than dividends, and enjoys more favorable taxationTreatment. Data show that the average annual repurchase amount of S&P 500 constituent stocks in recent years has exceeded US$500 billion.

The core motivation driving corporate repurchases

The management incentive mechanism is an important driver. Executive compensation of U.S. listed companies is often related to EPS and other indicatorsLinked to the above, improving short-term financial indicators through repurchase can directly increase management's equity incentive income. The return of overseas profits released by the tax cut policy in 2018 has also created a historic repurchase peak. The repurchase scale of technology giants such as Apple exceeded 10 billion US dollars in a single quarter.

The need for market valuation management cannot be ignored..When the company believes that the stock price is undervalued, repurchases can not only send a signal of confidence, but also support the stock price by reducing supply. Berkshire Hathaway has long used repurchases as a capital allocation method to replace mergers and acquisitions. However, some companies do not hesitate to borrow heavily for this purpose, causing the asset-liability ratio to rise. In 2019, the ratio of U.S. non-financial corporate debt to GDP reached 74%.

Complex impact on shareholder value

In the short term, repurchases can indeed create significant benefits. In addition to increasing EPS, the reduction in outstanding shares will increase the shareholding ratio of remaining shareholders. Microsoft has reduced outstanding shares by 20% through repurchases in the past ten years, and its stock price has increased by 400 during the same period.%. Dividend yields will also rise passively due to the shrinkage of equity capital, which is very attractive to investors pursuing stable returns.

But long-term hidden dangers are gradually emerging. Excessive buybacks may crowd out R&D investment. Boeing is accused of insufficient funds for passenger aircraft R&D due to its addiction to buybacks. Some companies even have buyback amounts exceeding their net profits.In an extreme case, 18% of the S&P 500 constituent stocks fell into this situation in 2018. When the economy goes down, these highly leveraged companies that engage in repurchases will face greater risks.

There is a fierce debate in academic circles. Supporters believe that this is the most effective way to allocate capital, while opponents accuse it of promoting short-termism. Empirical research shows that the subsequent innovation output of repurchased companies dropped by an average of 15% from 2003 to 2012. Federal Reserve research also pointed out that the repurchase wave intensified the "false fire" of the stock market.uot;, making valuations increasingly divorced from fundamentals.

Comparative Observation of Market Practices in China and the United States

There are fundamental differences in the institutional environment. China's Company Law strictly limits repurchases and requires cancellation within one year, while the United States allows long-term holding of treasury sharesYes. The scale of A-share repurchases only accounts for 1/10 of the U.S. stocks, but it accelerated significantly after the New Deal relaxed conditions in 2018, and cancellation-type repurchases began to appear in cases such as 360.With the advancement of the registration system reform, China's leading companies are gradually accepting the concept of "slimming and fitness". Moutai's first special dividend in 2022 draws on the buyback logic.Cycle and implementation proportion. High-quality companies improve capital efficiency through buybacks, while mediocre companies may fall into the quagmire of financial manipulation. As the U.S. interest rate hike cycle advances, the buyback boom that relies on cheap funds is receding, which will force companies to re-examine the true way to create value.

For multinational operating companies,In other words, it is necessary to develop differentiated shareholder return strategies based on the regulatory requirements of various countries. Lexun Finance and Taxation Consulting recommends: Before implementing repurchases, cash flow sustainability, debt affordability and alternative investment opportunities should be comprehensively evaluated to avoid falling into the trap of "repurchases for the sake of repurchases" and truly allow capital operations to serve long-term strategic goals.