Worse still, Exxon and Chevron announced last week that they would spend billions of dollars of their earnings to buy back their own stock, thereby fattening investors’ portfolios.
But a recent paper from a nonpartisan think tank suggests that buybacks may not be quite as harmful to ordinary people with no money on the market as critics suggest.
Buybacks, which increase the value of a company’s stock and reward shareholders and executives immediately, have been a hot topic in politics since they were legalized in 1982. Back then, the Securities and Exchange Commission passed a rule that allowed companies to buy their own stock without being charged with stock manipulation.
They’re also incredibly common. Last year, companies in the S&P 500 repurchased a record $882 billion of their own stock. According to SEC data, executives sell more stock in the eight days following a company buyback announcement than at any other time.
These buybacks have surged in recent years as U.S. companies post huge profits and excess profits during their biggest expansion since World War II. Democrats in Washington also refocused their scrutiny of the practice after former President Donald Trump cut corporate tax rates from 35% to 21%. The change prompted a rapid increase in buybacks. According to the Senate Treasury Committee, America’s largest companies spent $728 billion buying their own stock in 2019, a 55% increase from 2018.
What critics say
Critics and lawmakers argue that buybacks allow ultra-wealthy executives to manipulate markets while allowing corporate profits to flow into their own pockets rather than the economy. Corporate stocks are largely owned by wealthy Americans: the top 10% of US households by wealth own about 90% of corporate equity. Money should be better spent on the long-term growth of the companies and on the employees, they say.
At the time, Senate Democrats like Sherrod Brown of Ohio and Ron Wyden of Oregon proposed introducing a 2% tax on buybacks.
Now that the country is on the brink of recession and facing historically high inflation rates, the practice is back in the spotlight.
Politicians concerned that companies are using their money to help shareholders rather than consumers and workers are proposing increased scrutiny of the practice.
The White House proposed new rules to curb share buybacks as part of its $5.8 trillion 2023 budget plan. The plan provides for company executives to hold company stock for a specified number of years and bar them from selling stock for a specified period of time after a proposed buyback. The White House has not given the exact number of years.
Deterring stock buybacks “would balance the interests of executives with the long-term interests of shareholders, workers and the economy,” says the proposal, which reflects a long-held Democratic position that buybacks manipulate stock prices and keep money from growth and Subtract corporate innovation.
The big picture
Companies counter that they use buybacks as a way to allocate excess capital efficiently.
His argument hinges largely on a trickle-down effect from shareholders to the rest of society. “Buybacks offer investors, including beneficiaries with 401k and annuity investments market-wide, additional financial resources they might not otherwise have had,” they write. “These additional resources can in turn be reinvested or saved, which can provide small businesses and others with the capital they need to fuel innovation and growth.”
Claims that buybacks distract from other forms of investing are also flawed, says Jesse Fried, a professor at Harvard Law School.
“In short, the S&P 500 shareholder payout numbers can’t provide much basis for the idea that short-termism has deprived public companies of the capital they need,” he wrote.
Buybacks are decreasing
Earlier this year, Goldman Sachs estimated that 2022 would see a record $1 trillion in buybacks. That’s unlikely. To date, 58% of companies have reported their buybacks for the second quarter, and they’re down 12.9% from the first quarter (although they’re still up about 7% since last year), according to Howard’s data Silverblatt, Senior Index Analyst at S&P Dow Jones Indices.
JPMorgan halted its buyback program in July, signaling a more cautious outlook as the economy flirts with a recession. The suspension also came after the US’s largest bank failed the Federal Reserve’s stress test, causing it to scramble to generate more capital.
Bank of America and Citigroup also fared poorly in the test, which assesses a bank’s ability to lend during a severe global recession with 10% unemployment and a sharp fall in asset prices.
Large banks accounted for 19.5%, or $54.7 billion, of all buybacks in the first quarter of 2022. Financial sector buybacks are currently 56.4% lower than last quarter and 50% lower year-on-year.