New Buyback Tax Will Force Companies to Think Twice on How to Use Cash

In the scrap over how to fund President Joe Biden’s spending plans, the Democrats’ focus has shifted from taxing private funds to public at the last minute.

Sen. Kyrsten Sinema (D., Ariz.) backs dropping a proposed tax increase on carried interest income and adding a 1% tax on stock buybacks to the legislation.

It means that private-equity firms such as

KKR
,

Blackstone
,
and

Carlyle

—which, ironically, are all publicly listed—hang onto their beloved tax break on the sale of portfolio assets that is set at 23.8%, against ordinary income or wages that are taxed at 37%.

Instead, a 1% levy on corporations’ share repurchases will make chief financial officers think twice about how they use their cash.

It is set to be a record year for U.S. buybacks, with some $1.2 trillion forecast to be spent, including bumper programs under way at

Apple

and Google owner

Alphabet
.

When choosing how to reward investors, companies like buybacks compared with dividends because they increase per-share measures of earnings and cash flow and benefit return on equity. They can be directors’ way of trying to put a floor under the share price—although they look wasteful if the stock drops.

Little over 40 years ago, the practice was regarded as market manipulation. Now it is so ingrained that when President Donald Trump hoped for jobs and technology investment after his 2017 corporation tax cut, there was only one place for the windfall to go.

For investors, buybacks result in capital gains that may never be taxed at all, whereas dividends require income tax to be paid.

Critics say this latest change will decrease liquidity and increase index volatility. However, most companies are likely to view it as another cost that won’t diminish buybacks much—nor boost dividends.

James Ashton

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***

Tesla Cleared for Stock Split as Musk’s Twitter Battle Continues

Tesla

shareholders approved a 3-for-1 stock split, and CEO Elon Musk said at the company’s annual meeting on Thursday that the electric-vehicle maker could build 10 to 12 factories in its quest to sell 20 million vehicles a year.

  • Musk didn’t say whether that factory total includes the existing four centers, including the one in Austin, Texas, where the shareholder meeting was held. The meeting was webcast as the live event had limited capacity. News about Tesla’s next factory could come later this year, Musk said.

  • The stock split is the second in two years, and since the last one the shares have roughly tripled. A split doesn’t affect the company’s market value but can appeal to new investors by making the price of one share more affordable to buy.

  • Shareholders approved the re-election of directors Ira Ehrenpreis and Kathleen Wilson-Thompson, who have been on Tesla’s board since 2007 and 2018, respectively.

    Oracle

    co-founder Larry Ellison, who joined the board in 2018, didn’t stand for re-election, so the board shrinks to seven.

  • Musk also faces a stand off this fall with

    Twitter

    over his attempt to back away from his $44 billion take-private offer for the social-media platform. Twitter said Thursday that Musk’s claims he was “hoodwinked” into signing the agreement are “implausible.”

What’s Next: Musk has countersued Twitter, and the two sides are scheduled to square off in Delaware Chancery Court for a five-day trial in October. On Thursday, the judge in the case said Musk’s confidential claims, partly revealed by Twitter on Thursday, would be made public by today.

Liz Moyer

***

Virgin Galactic Pushes Back Launch of Commercial Service Again

Shares of

Virgin Galactic

were tumbling Friday, after the space-tourism company pushed back the launch of commercial service to the second quarter of 2023. Virgin Galactic previously said it expected to start commercial space-tourism service in the first quarter of next year. That was after pushing back the launch to the fourth quarter of 2022.

  • In a statement that accompanied the company’s second-quarter earnings, Virgin Galactic said the latest delay was “due to extended completion dates within the mother ship enhancement program.” The stock fell more than 10% in the Friday premarket.

  • CEO Michael Colglazier said: “While our short-term plans now call for commercial service to launch in the second quarter of 2023, progress on our future fleet continues and many of the key elements of our road map are now in place to scale the business
    in a meaningful way.”

  • Virgin Galactic reported a second-quarter loss of 43 cents-a-share on revenue of $357,000 in revenue, down from $571,000 last year. Free cash flow in the period was a negative $91 million, compared with a negative $66 million in the second quarter of 2021. The company said it expects negative free cash flow of $110 million to $120 million in the third quarter.

What’s Next: Make no mistake about the complexities of commercializing space travel. Investors should care more that Virgin Galactic is perfecting the technology, economics, and strategy of what is a pioneering venture. History is unlikely to remember the quarterly delays. Next step, Virgin Galactic announced last month it is joining with

Boeing Aurora Flight Sciences

to design the company’s next-generation mother ships.

Joe Woelfel and Rupert Steiner

***

Wall Street’s Deal Drought Could Dry Up Year-End Bonuses

Wall Street’s deal drought this year threatens to dry up the pool of year-end bonuses, raising the possibility that some investment banking groups could see their bonuses slashed nearly in half, according to a closely watched report from compensation consulting firm Johnson Associates.

  • The projections are based on activity so far this year, and the numbers have been bleak. The $1 trillion in deals announced in the U.S. through late July are down 40% from last year, when deals boomed, according to Dealogic.

  • Bonuses in merger advisory roles at banks could drop 20% to 25%, the report said. Securities underwriting could be even harder-hit, given the lack of initial public offerings this year. Their bonuses could fall 40% to 45%.

  • The report said revenue from equity underwriting is down 75%, while debt underwriting revenue is down 30%.

    Morgan Stanley
    ’s
    second-quarter investment banking revenue fell 55%, reflecting lower deal volumes and the underwriting drop.

    Goldman Sachs

    investment banking revenue fell 41% in the quarter, also reflecting less underwriting activity.

  • While deal making is down, traders have fared better. Bond traders could see a 15% to 20% bonus bump, while traders at hedge funds could see bonuses climb 10% to 20%, and equities traders could see 5% to 10% increases.

What’s Next: Johnson Associates said Wall Street’s “war for talent” is slowing and head count will decrease “as firms scale back” after a flurry of hiring in 2021 and early 2022, leading to speculation about potential layoffs. It also said the potential for a bonus crunch could create recruiting challenges.

Janet H. Cho and Liz Moyer

***

AMC Entertainment Aims to Offer ‘APE’ Preferred Shares

AMC Entertainment Holdings

announced plans to offer a dividend of preferred shares called “APE,” for AMC preferred equity units. It is a reference to the individual investors, who call themselves apes, and who helped keep the largest cinema chain going through the Covid-19 pandemic, The Wall Street Journal reported.

  • AMC applied to list them on the New York Stock Exchange under the symbol “APE,” granting one Ape for each share of class A common stock, creating about 517 million Ape units. After offering those Ape units to shareholders, AMC will have close to 4.5 billion remaining units that could be sold.

  • AMC had a net loss of $121.6 million in the second quarter, and revenue of $1.166 billion, about what analysts’ expected. CEO Adam Aron called it a “spectacularly encouraging second quarter,” MarketWatch reported.

  • Second-quarter attendance surged to 59 million people globally, up 168% from last year thanks to blockbusters
    such as Tom Cruise’s Top Gun: Maverick, the top movie of the quarter, according to Box Office Mojo.

  • It has been a fitful pandemic rebound for Hollywood.

    Warner Bros. Discovery

    axed the $90 million DC Comics superhero film Batgirl, which was destined for its HBOMax streaming platform. Warner reported a $3.4 billion second-quarter loss.

What’s Next: One of the last potential blockbusters of the summer debuts this weekend with

Sony
’s
Bullet Train, starring Brad Pitt. Early estimates have it bringing in $30 million in domestic sales and $60 million worldwide, according to Deadline.

Janet H. Cho

***

Focus on Warren Buffett’s Berkshire Hathaway’s Earnings

Investors will scrutinize

Berkshire Hathaway
’s
second-quarter earnings on Saturday to how CEO Warren Buffett’s conglomerate is weathering inflation and a market downturn that has hit some of its biggest holdings, including portfolio investments Apple.

  • Berkshire already owns a giant stake in Apple, whose price fell to $130 a share in the second quarter. Berkshire snapped up three million shares of the iPhone maker in the first quarter, when the stock was trading in the $150s.

  • Inflationary pressures on Berkshire’s real estate and auto insurance businesses, where rising costs could make claims more costly, could outweigh gains from its energy and railroad stocks, Bloomberg reported. Operating unit Geico is the second-largest private auto insurer.

  • Buffett has long said one of the keys to success in investing is acting when other people are running scared. Amid this year’s market downturn, Berkshire bought insurance company

    Alleghany Corp.
    ,
    increased its stake in

    Chevron
    ,
    and bought shares in

    HP Inc.

    and others, Bloomberg noted.

  • Berkshire bought more shares of energy company

    Occidental Petroleum

    in the second quarter and now holds about $12 billion of the energy company, according to regulatory filings.

What’s Next: Berkshire will likely report a second-quarter loss because of the stock market drop, but investors will be watching for what else Buffett bought after the $41 billion first-quarter buying spree. More details on stock purchases in the quarter will come later in August in a separate regulatory filing.

Janet H. Cho

***

Do you remember this week’s news? Take our quiz below about this week’s news. Tell us how you did in an email to [email protected]

1. Robinhood Markets, facing a weak trading environment and this year’s falloff in cryptocurrency trading, announced a second round of layoffs this year. How much of its workforce is it cutting?

a. 23%

b. 20%

c. 17%

d. 14%

2. David Einhorn’s Greenlight Capital, best-known for its value investing style, told investors this week it was jumping into a merger arbitrage situation with which stock?

a. Activision Blizzard

b. Spirit Airlines

c. Twitter

d. Seagen Inc.

3. Activist investing fund Elliott Management often takes stakes in companies to make changes, something that cheers investors. This week, two stocks got a big bounce when Elliott confirmed big stakes in them. Which two are they?

a. Meta Platforms and Beyond Meat

b. Pinterest and PayPal

c. Tesla and Rivian Automotive

d. AMC Entertainment and GameStop

4. The Organization of the Petroleum Exporting Countries and its allies agreed to raise oil production starting in September by how many barrels a day?

a. 100,000

b. 120,000

c. 140,000

d. 160,000

5. The Bank of England raised interest rates by the most it has in a quarter-century Thursday, and predicted the U.K. would fall into a recession this year. How much did it raise rates?

a. 1.0%

b. 0.75%

c. 0.50%

d. 0.25%

Answers: 1(a); 2(c); 3(b); 4(a); 5(c)

Barron’s Staff

***

—Newsletter edited by Liz Moyer, Camilla Imperiali, Rupert Steiner, Joe Woelfel