Share buybacks aren’t perfect, but neither are they evil

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Share buybacks aren’t perfect, but neither are they evil

Are share buybacks really the great corporate evil the progressive wing of U.S. politicians makes them out to be? The practice, which has ballooned in the post-recession era, was the target this week of a diatribe in The New York Times by Bernie Sanders and Chuck Schumer, senators both, who called corporate share repurchases “an enormous problem for workers and for the long-term strength of the economy.”

No doubt, the good senators see a winner in making share buybacks a political issue. And as headline-grabbing efforts go, their timing is good: Stock repurchases in the United States exceeded US$1 trillion last year — a record high “fuelled by the Trump tax cut,” as Sanders and Schumer (correctly) point out in their op-ed. They go on to claim that share buybacks are having two negative impacts: First, only shareholders benefit financially from them, and since rich people own (a lot) more stock than others, buybacks are aggravating income inequality in America; and second, they divert cash from more productive and equitable uses, like corporate investments or giving raises to workers.

So what you end up with are relatively poorer ordinary folks, along with corporations that are constrained from meaningfully contributing to the overall economy “in terms of R&D, equipment, higher wages, paid medical leave, retirement benefits and worker retraining.”

To fight this double whammy of badness, the senators promise legislation that would ban corporations from buying back shares unless workers and the economy get “paid” first, in the form of higher minimum wages or some other kind of investment.

This seems a rather odd plank to walk out on, if only because presumably few Americans (or other nationalities) either know or care much about stock buybacks anyway, and because there are so many sexier targets on the right: the unstable Republican administration, the Russia investigation, Stormy Daniels, tax cuts, foreign policy, and on and on. Still, maybe stock buybacks will serve progressives well as a straw man for anti-big-business politicking. Time, and the results of the 2020 federal election, will no doubt tell.

But are they really a “problem”? I admit I’ve never been a huge fan of the share repurchasing craze, if only because it seems a lazy way for corporate executives to deploy extra cash. It’s also true that the soaring values of stock buybacks — not just in the States; they reached a record high in Canada last year as well — have coincided with business investment remaining relatively flat.

I tend to think (and perhaps it’s only a bias) that companies that invest in research and development are better positioned for long-term health and return to shareholders, so to the extent that buybacks discourage that, they are cause for concern. As well, I wonder how the buyback addiction will evolve. Are corporations financing buybacks with (cheap) debt, and what will happen when rates soar? Are some, at least, going to start abusing them simply to juice the short-term stock price? Long-term investors might be better served by companies dispersing cash through sustainable dividends — which are harder for CEOs to stop once they’ve started them, and therefore more dependable (though hardly risk-free).

… the soaring values of stock buybacks have coincided with business investment remaining relatively flat.

The thing, though, is this: There isn’t much evidence that stock buybacks are damaging to the economy or to corporate fortunes. And the rationale for tying them to other expenditures, such as wages or pensions, is just looney and will likely be ineffective.

A 2017 study by the Federal Reserve looked across developed

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