Equities Are Disappearing

Despite high stock prices, the volume of corporate equities retired via corporate purchases outpaced new issues last year for the first time since 1989, and the trend seems to be continuing. Indeed, as economist Gary E. Schlossberg of Wells Fargo Bank points out, corporate equities are selling at around a 40% premium over the replacement costs of underlying assets--"a level that usually encourages new issue activity and discourages the elimination of supply."

One reason for the reemergence of equity liquidation, says Schlossberg, is a new wave of acquisitions undertaken by cash-rich U.S. companies seeking to expand global market share or reduce costs through economies of scale. At the same time, the low dollar has made U.S. acquisitions cheap for foreign buyers despite high stock prices.

Second, Schlossberg notes that stock buybacks are now being driven by the large gap between taxes on ordinary income and those on capital gains. Companies are choosing to divert spare cash from dividends, which are taxed as ordinary income, to buybacks that boost stock prices and generate lower-taxed capital gains for their shareholders.

This trend helps explain why the dividend payout rate for Standard & Poor's 500 companies is close to a historic low. "If Congress cuts the capital-gains tax," predicts Schlossberg, "dividend yields are likely to remain relatively meager."

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