Between 2008 and 2017, 466 of the S&P 500 companies spent around $4 trillion on stock buybacks, equal to 53 percent of profits. The Trump tax cut of 2018, helped corporations to repurchased more than $1 trillion of their own stock, a staggering figure and the highest amount ever authorized in a single year.
Under a share buyback program, a company purchases a certain number of its own shares on the open market. Reducing the number of outstanding shares making the remaining shares worth more. One of the most obvious reasons for the growth of such programs is to help offset the effects of generous stock compensation packages for executives, including stock options and stock contributions to employees’ 401(k) programs.
In theory, management only repurchases stock if it expects to enhance shareholder value more that way than by using the cash for capital spending, acquisitions, product development or dividend distributions. In reality, it has helped poor management use financial engineering to artificially increase earnings and hopefully keep share prices from falling in value.
A very simple example below shows how financial engineering works. A corporation buybacks 50,000,000 shares at $20.00 each which increases earnings by $0.25 and reduces the price earnings ratio from 20 to 16 making the company more attractive to investors.
General Electric is a perfect example of corporate mismanagement. From 2015 to 2017, they repurchased $40 billion dollars’ worth of shares at prices between $20 and $32 and their share price is now only $10.21, a total waste of shareholders’ money.
When corporations direct resources to buy back shares on this scale, they reduce their ability to reinvest profits more meaningfully in the company in terms of R&D, new equipment, higher wages, paid medical leave, retirement benefits and worker retraining.
It’s no coincidence that at the same time that corporate stock buybacks have reached record highs, the median wages of average workers have remained relatively stagnant. Far too many workers have watched corporate executives cash in on corporate stock buybacks while they get handed a pink slip.
Recently, Walmart announced plans to spend $20 billion on a share repurchase program while laying off thousands of workers and closing dozens of Sam’s Club stores. Using a fraction of that amount, the company could have raised hourly wages of every single Walmart employee to $15, according to an analysis by the Roosevelt Institute.
Walmart is not alone. Harley Davidson authorized a 15 million share stock-repurchase around the same time it announced it would close a plant in Kansas City, Mo. And Wells Fargo has spent billions on corporate stock buybacks while openly plotting to lay off thousands of workers in the coming years.
Senators: Sanders-Schumer propose a bill to limit buybacks
Their bill would 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.
They point out:
The past two years have been extremely disappointing for millions of workers. President Trump promised the typical American household a $4,000 pay raise as he pushed for his tax giveaway to the rich. The reality, however, is that from December 2017 to December 2018, real wages for average workers have gone up by just $9.11 a week. Why should a company whose pension program is underfunded be able to buy back stock before shoring up the pension fund?
Stock buybacks don’t benefit the vast majority of Americans because large stockholders tend to be wealthier. Nearly 85 percent of all stocks owned by Americans belong to the wealthiest 10 percent of households. So when a company buys back its stock, boosting its value, the benefits go overwhelmingly to shareholders and executives, not workers.
What do you think? Should government limit share buybacks?