Many companies have embraced stock buybacks recently as a way to return capital to shareholders without forcing them to pay the taxes that a dividend payment would require. Yet with rising ire against share repurchases, a newly proposed rule could stop the companies that have used buybacks from doing so as freely in the future. Sen. Tammy Baldwin (D-Wisc.), along with cosponsors Sen. Brian Schatz (D-Hawaii) and Sen. Elizabeth Warren (D-Mass.), introduced legislation last week that would essentially prohibit companies from doing stock buybacks.

If the provision were to become law, then hundreds of companies would be affected. Among them are the biggest stocks in the Dow Jones Industrials. Below, we'll look more closely at some of the biggest users of buybacks and what they could face if rules change regarding the practice.

Biggest buybacks among Dow stocks

Stock

Buyback, Past 12 Months

Apple (NASDAQ:AAPL)

$32.1 billion

JPMorgan Chase (NYSE:JPM)

$15.4 billion

Boeing (NYSE:BA)

$9.24 billion

Disney (NYSE:DIS)

$9.22 billion

Microsoft (NASDAQ:MSFT)

$8.41 billion

Data source: S&P Global Market Intelligence.

What's behind the buyback craze?

A combination of factors has helped to make buybacks increasingly popular lately. First and foremost, companies have had more money than they know what to do with for quite a while, and returning it through share repurchases is a tax-friendlier solution for many investors than paying dividends.

Institutional investors have been increasingly forthright about demanding that companies either put free cash to work on productive business investments or put it back in the hands of their shareholders. Apple, for instance, has been ramping up its stock repurchases for a long time, largely because its electronic device business has done so well in producing free cash flow that money has accumulated on its balance sheet for years. Only the efforts of activist investors several years ago spurred the decision for Apple to pay meaningful dividends and start thinking about capital allocation in a more shareholder-friendly way.

Apple Store location on first floor of outdoor mall, with palm tree nearby.

Image source: Apple.

In some cases, companies do buybacks because regulators aren't as comfortable with dividends. JPMorgan announced a $19.4 billion buyback plan in mid-2017 as part of its capital plan filed with the Federal Reserve, amounting to about 6% of its outstanding shares based on prices at the time. JPMorgan might have chosen instead to boost its dividend, but bank regulators have stated a preference to keep payout ratios at relatively low percentages of total earnings. That leaves banks like JPMorgan unable to return desired capital in full to investors, and buybacks become a second-best option.

How tax reform juiced buybacks

More recently, tax law changes that took effect at the beginning of 2018 have had an explosive upward impact on stock buyback activity. The change in the way the U.S. imposes tax on international operations resulted in one-time deemed repatriation tax liability for some major players in the economy, especially Apple and Microsoft. Some now expect Apple to repurchase more than $120 billion in stock over the next two years alone, and Microsoft hasn't yet decided how it could deploy the newly freed-up cash at its disposal.

Even outside tech, tax reform has caused some companies to ramp up their payouts. Boeing said late last year that it would replace a partially used $14 billion repurchase authorization with a fresh $18 billion buyback program. Disney is being even more aggressive, approving $10 billion for buybacks between late 2017 and when it expects to close on its acquisition to key assets from 21st Century Fox. Following the purchase, the House of Mouse will add another $10 billion repurchase.

Expect more buybacks

Legislation that would effectively restrict buyback activity could force huge disruptions to major companies that have made share repurchases a fundamental part of their capital allocation strategies. Yet with little chance of passage, shareholders in these five Dow stocks don't need to worry much about anything happening in the near-term.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Dan Caplinger owns shares of Apple, Boeing, and Walt Disney. The Motley Fool owns shares of and recommends Apple and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.