The buyback bug is back. How worried should we be?

Even more aggravating: Exxon and Chevron announced last week that they would spend billions of dollars of their earnings buying back their own shares, fattening investors’ wallets.

The oil companies are certainly not alone, but they have helped bring buybacks back into the spotlight. The stock buyback debate has been raging for four decades and Democrats are trying to curb it.

But a recent article by a bipartisan think tank suggests that buybacks may not be as bad for ordinary people with no money in the market as critics suggest.

Buybacks, which increase the value of a company’s stock and instantly reward shareholders and executives, have been a hot political issue since they were legalized in 1982. It was then that the Securities and Exchange Commission passed a rule that allows companies to buy their actions without being accused of stock manipulation.

They are also incredibly common. Last year, the S&P 500 companies repurchased a record $ 882 billion in treasury stock. Executives sell more stock in the eight days following a buyback announcement from their companies than at any other time, according to SEC data.

These buybacks have soared in recent years as US companies have recorded huge gains and excess profits in the largest expansionary period since World War II. Democrats in Washington also refocused their review of the practice after former President Donald Trump lowered corporate tax rates to 21% from 35%. The change has led to rapid growth in buybacks. In 2019, America’s largest corporations spent $ 728 billion on the purchase of their own shares, a 55% increase from 2018, according to the Senate Finance Committee.

What the critics say

Critics and lawmakers argue that buybacks allow ultra-wealthy executives to manipulate markets while funneling corporate profits into their own pockets rather than the economy. Corporate stocks are largely owned by wealthy Americans – the richest 10% of US households by wealth owns about 90% of the share capital. The money would be better spent on long-term growth of companies and employees, they say.

Senate Democrats like Sherrod Brown of Ohio and Ron Wyden of Oregon proposed instituting a 2% buyback tax at the time.

Now, as the country teeters on the brink of recession and faces historically high inflation rates, the practice is back in the spotlight.

Politicians, worried that companies are using their money to help shareholders rather than consumers and workers, are proposing greater oversight of the practice.

The White House has proposed new rules intended to curb share buybacks as part of its $ 5.8 trillion budget plan for 2023. The plan would require company executives to hold the company’s shares for a number of years and prohibit them from selling stock for any length of time after a planned repurchase. The White House did not specify the exact number of years.

Discouraging share buybacks “would align the interests of executives with the long-term interests of shareholders, workers and the economy,” says the proposal, which echoes a long-argued democratic position that buybacks manipulate share prices and distract money from the growth and innovation of companies.

The SEC also proposed to require disclosure of detailed information on repurchases, including the purpose or rationale for the share repurchase and the process or criteria used to determine repurchase amounts.

The big picture

The companies argue that they use buybacks as a way to efficiently distribute excess capital.

They may be right: The Bipartisan Policy Center released a white paper last week that challenged the need for the SEC rule and concluded that “share buybacks provide significant economic benefits to society.”

His argument is largely based on a cascade effect from shareholders to the rest of the company. “The buybacks provide investors, including those beneficiaries with 401k and pensions invested across the market, additional financial resources that they otherwise would not have had,” they write. “These additional resources can in turn be reinvested or saved, which can provide the capital needed for small businesses and others to facilitate innovation and growth.”

Claims that buybacks detract from other forms of investment are also incorrect, says Jesse Fried, a professor at Harvard Law School.

Between 2007 and 2016, Fried found that the S&P 500 companies distributed $ 7 trillion through repurchases and dividends, or more than 96% of their aggregate net income, promoting “short-term” claims. But during that decade, she found, investments in their businesses increased substantially even as cash balances increased.

“In short, the S&P 500 shareholder payment data cannot provide much basis for the idea that the short term has deprived public companies of the necessary capital,” he wrote.

Buybacks are decreasing

Earlier this year, Goldman Sachs estimated that 2022 would see a record $ 1 trillion in buybacks. This is unlikely to happen. To date, 58% of companies have reported buybacks in the second quarter and they are down 12.9% from the first quarter (although they are still up about 7% from last year), according to data from Howard Silverblatt, senior indices analyst at S&P Dow Jones Indices.

JPMorgan halted its buyback program in July, signaling a more cautious outlook as the economy flirts with recession. The suspension also came after the largest US bank failed the Federal Reserve’s stress test, forcing it to struggle 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 unemployment reaching 10% and a sharp drop in asset prices.

Big banks accounted for 19.5%, or $ 54.7 billion, of all buybacks in the first quarter of 2022. Buybacks in the financial sector are currently 56.4% lower than last quarter and 50% lower. compared to last year.

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