Tax cuts become stock cuts

Treasury stocks or treasury shares are not related to the Department of Treasury. Treasury stocks are the issued stocks not outstanding in the market. They are the portion of issued stocks that a company keeps in its own treasury. These stocks may be resulted from a repurchase or buyback from the company. They don’t pay dividends, have no voting rights and should not be included in shares outstanding calculations.

The recent tax cuts made by President Trump will allow companies to own excess cash flow. Trump’s purpose was to encourage companies to use the additional cash to invest in new capacity or develop new technology, which in turn will boost our economy. However, what we have seen is that many companies take the advantage of the windfall to cut their outstanding stocks by buying back more shares.

When companies buy more shares back as treasury stocks, the buying itself drives up their stock prices. On the other hand, there are less outstanding shares on the market, so the earnings per share increase. From both perspectives, the stock prices are pumped up. The rising stock prices are not naturally based on better business profits, but are artificially manipulated.

How long the artificial manipulation can last is a question mark.

Comments are closed