What Is a Share Buyback?
If you’ve paid attention to corporate investment strategies in the past few decades, then what companies are doing now with their extra money from the Republican tax plan is not surprising. Some have provided one-off bonuses to employees (fewer have paid the actual increase), but a much larger portion of the additional cash goes towards share buybacks and dividend payments.
Dividends are a reward for shareholders, and you can find out more about how you can make a profit here . On the other hand, share buybacks are when companies buy their own shares – instead of paying those dividends or accumulating cash – inflating the firm’s earnings per share in the short term, as fewer shares are available to investors. All this means that the company looks more profitable, and then its stock price is artificially inflated.
Share buybacks do not benefit employees, but are a boon for hedge funds and executives who rely on inflated stock prices for bonuses. As Bloomberg notes, they were not legal until 1982, “after the SEC relaxed its definition of stock manipulation.”
On top of all this, you may be wondering what the big problem is. Buybacks are partly to blame for the low profits since the recession, even as companies are making record profits and executives are getting richer, according to William Lazonik , an economist at the University of Massachusetts in Lowell. As Lazonik writes in the Harvard Business Review :
Consider 449 S&P 500 companies listed on the stock exchange from 2003 to 2012. During this period, these companies used 54% of their profits – a total of $ 2.4 trillion – to buy back their own shares, almost all through open market purchases. market. Dividends absorbed an additional 37% of their income. There was very little left to invest in manufacturing capabilities or raise employee income.
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[T] The very people we rely on to invest in manufacturing capabilities that will enhance our shared prosperity are instead channeling most of their companies’ profits towards goals that increase their own prosperity, with no surprise. Even after adjusting for inflation, the remuneration of top US leaders has doubled or tripled since the first half of the 1990s, when it was already considered excessive by many. Meanwhile, overall US economic performance has faltered.
One of the main arguments for tax cuts was that you, me, and everyone we know will benefit, and workers will finally see the benefits as benevolent corporations use their newfound generosity to invest in their employees. It’s a corporate tax cut that will finally help the average Joe.
But no, it turns out that this is not actually happening. Here’s a pretty picture from Bloomberg :
In February this year alone, US firms announced $ 153.7 billion in buybacks, a monthly record . Not that they want you to know. Throughout December 2017 and early in the new year, companies were in a feverish PR campaign, publicly proclaiming all the good things that should come with the new tax cut. It all sounded great: new plants! More money! Work for everyone! Here’s a breakdown of some of Comcast’s tax bills, courtesy of Bloomberg’s Stephen Gandel :
Comcast Corp., for example, said it will spend $ 50 billion over the next five years, which the company claims will create thousands of jobs, all thanks to tax bills. Not so fast. That’s roughly what Comcast has spent on capital expenditures in the past, long before tax revenues came.
Overall, Gandel estimates that “roughly 60 percent of tax revenue goes to shareholders versus 15 percent for employees,” including pay increases and benefits. According to Lazonik, this is a continuation of a trend that has been observed since the late 1980s, when the largest component of income for the richest 0.1 percent “was compensation through stock-based payment. Meanwhile, the growth of workers’ wages was slow and sporadic. “
Thus, buybacks help reduce inequality. As Bloomberg’s Joe Nocera writes, “Surely [a pay raise] would be a better use of capital than a stock buyback. It can even make the company more productive. Instead, companies and their shareholders are sharing the spoils that labor made possible, preventing workers from sharing the wealth. “
Remember, as companies use the GOP tax cut to enrich their executives with inflated profits, the $ 1,000 bonus is left to workers, not a 401 (k) match .