Are Stock Buybacks Good for Shareholders but Bad for Society?
When the Coca-Cola Co. announced last week that it plans to buy back 150 million of its shares, it joined an epic buying spree by U.S. corporations. In 2018, companies announced plans to buy back more than $1 trillion of their outstanding shares, a record total. And the momentum is continuing this year. The goal is to boost their share prices by taking some of their stock off the market, which is generally good news for stockholders, including the executives of those companies. In fact, the buybacks are a key driver of the stock market's current surge. But the buyback binge now faces a backlash from elected officials on both sides of the aisle, who say that the practice rewards asset-rich investors but fails to benefit the vast majority of Americans. Senators Chuck Schumer, a Democrat from New York, and Bernie Sanders, an independent from Vermont, raised the battle flag earlier this month with an op-ed piece in the New York Times, declaring that in recent decades "corporate boardrooms have become obsessed with maximizing only shareholder earnings to the detriment of workers and the long-term strength of their companies, helping to create the worst level of income inequality in decades." Between 2008 and 2017, the senators said, "466 of the S&P 400 companies spent around $4 trillion on buybacks, equal to 53% of profits." By giving so much to shareholders, the companies failed to reinvest those profits in research and development or better wages and benefits for their workers. In fact, some companies including Walmart and Wells Fargo have announced stock buybacks even while planning to lay off thousands of employees. As a remedy, the senators said they plan to introduce legislation that will "prohibit a corporation from buying back its own stock unless it invests in workers and communities first, including things like paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits." Within days, Republican Senator Marco Rubio launched his own plan to curb stock buybacks. His legislation would end the preferential tax treatment given to stock buybacks, in which profits are taxed as capital gains rather than as dividends. "We have too often failed to make the well-being of working Americans the terms for market success," Rubio wrote in a report from the Senate Small Business Committee, which he chairs. One reason corporations are pouring money into stock buybacks is that afters years of strong economic growth, they're awash in profits. "Companies often don't know what to do with their excess cash," wrote David Kelly, chief global strategist for JPMorgan Funds, in his weekly report for investors. But, as CNN reported, he thinks a clampdown would be a mistake. "It is far more efficient to let companies distribute the cash rather than encourage them to invest in areas that seem less profitable," he wrote, adding that "it is unnerving to see politicians from the left and right once again attack corporate greed as the source of all the nation's problems." Proposals to clamp down on the buybacks fail to appreciate a key economic function they provide, wrote Shawn Tully in Fortune. "Repurchases channel corporate earnings from old-economy stalwarts lacking profitable places to reinvest the cash to the industries of the future," he argued. "It's the cash distributed by a P&G or GM that, through this fluid ecosystem, funds expansion in fast-growers hungry for capital, in areas from cloud-based services to e-commerce distribution centers to electric cars." No less a sage than Warren Buffett came out in defense of stock buybacks last week in his widely followed annual letter, saying that his company Berkshire Hathaway plans a significant buyback. But he cautioned that such repurchases have to be done in a disciplined way. "Obviously, repurchases should be price-sensitive: Blindly buying an overpriced stock is value-destructive, a fact lost on many promotional or ever-optimistic CEOs," he wrote. How will the political debate shake out? In an editorial, the Washington Post proposed that "government should intervene subtly, if at all, and certainly not with the regulatory sledgehammer" proposed by Schumer, Sanders and other legislators. "Critics of stock buybacks are saying, in effect, that elected officials or regulators may know better than companies themselves what should be done with extra cash. It is far from clear that this is true, given that we have just gone through a long period in which both stock buybacks and job creation grew," the Post's editors wrote. "Best for Congress to make sure there really is a serious problem before trying to legislate a solution."
