The Debate Over Stock Buybacks, Explained | WSJ

Summary

In 2019, S&P 500 companies spent $189 billion on stock buybacks, a practice that has surged since 2010, totaling over $5.3 trillion. Critics argue that this capital could better support economic growth through investments like new factories or R&D. However, proponents believe buybacks benefit shareholders and executives, whose stock options gain value with rising stock prices. Despite concerns about corporate debt and lagging business investment, buybacks remain a significant aspect of American finance with no signs of slowing down.

Takeaways

• 📈 Companies on the S&P 500 spent an estimated $189 billion on stock buybacks in Q4 2019, the highest in three quarters but not the all-time record.
• 💰 The total amount spent on stock buybacks by S&P 500 companies since 2010 is over $5.3 trillion, indicating a significant trend over the past decade.
• 🚀 Buybacks are considered by some analysts as a driving force behind the decade-long bull market, highlighting their impact on stock performance.
• 🤔 There is ongoing debate about the economic benefits of stock buybacks, with skeptics arguing that funds could be better used for growth initiatives.
• 🏭 Critics of buybacks suggest that the money could be more effectively spent on building new factories or exploring new business opportunities.
• 💹 Proponents argue that buybacks are a way of returning value to shareholders, where they believe the money belongs.
• 💼 The tax cuts in 2017, high earnings, and low interest rates have contributed to a significant increase in corporate cash reserves available for various uses, including buybacks.
• 🔄 In a stock buyback, a company reduces the number of outstanding shares, which can increase the Earnings per Share (EPS) metric, making the stock appear more valuable.
• 📊 Over one-fifth of S&P 500 companies reduced share counts by at least 4% through buybacks in the most recent quarter, boosting EPS.
• 🔑 Stock buybacks can disproportionately benefit executives, as rising stock prices increase the value of their stock options, which is a point of contention.
• 📉 Critics link buybacks to a decline in business investment, suggesting that companies are not investing in growth as they could be.
• 💼 Politicians from both parties have expressed concerns about buybacks, with some proposing changes to how buybacks are taxed to encourage other forms of investment.
• 📚 Analysts note a potential risk in companies taking on debt to finance buybacks, which could be a sign of financial instability.
• 💡 Supporters of buybacks argue there's no clear link between buybacks and reduced capital investment, suggesting other economic factors may be at play.
• 🔄 Some argue that the increase in buybacks is partly offset by the issuance of new shares as part of employee compensation, suggesting a more nuanced picture.
• 🌐 The debate over buybacks reflects broader discussions about corporate responsibility, shareholder value, and the health of the economy.

Q & A

What was the estimated amount spent by S&P 500 companies on share buybacks in the fourth quarter of 2019?

In the fourth quarter of 2019, companies on the S&P 500 spent an estimated $189 billion on share buybacks.

Is the $189 billion spent in the fourth quarter of 2019 the highest on record for share buybacks?

No, the highest on record was in the final quarter of 2018, with about $223 billion spent on share buybacks.

Since 2010, how much have S&P 500 companies invested in share repurchases?

Since 2010, S&P 500 companies have invested more than $5.3 trillion in share repurchases.

What is the role of share buybacks in the decade-long bull market according to analysts?

Analysts say that share buybacks have been a driving force in the decade-long bull market.

What are the arguments against using company funds for stock buybacks instead of other investments?

Skeptics argue that the money used for stock buybacks could be better spent on investments like building new factories or exploring new opportunities.

How do stock buybacks benefit shareholders according to proponents?

Proponents say that buybacks are putting money where it belongs, with shareholders.

What factors have contributed to the increase in corporate cash reserves?

The tax cuts in 2017, relatively high earnings, and low interest rates have all contributed to increased corporate cash reserves.

How does a company's decision to buy back shares affect its Earnings per Share (EPS)?

A stock buyback reduces the number of outstanding shares, which in turn boosts the Earnings per Share (EPS) as it is calculated by dividing net income by the number of outstanding shares.

What criticism is there regarding the impact of stock buybacks on business investment?

Critics argue that the practice of buybacks is partly to blame for lagging business investment, as companies may not be investing enough in R&D, equipment, and other areas for growth.

What was the stance of Democratic senators Chuck Schumer and Bernie Sanders on stock buybacks in 2019?

In 2019, Democratic senators Chuck Schumer and Bernie Sanders argued that buybacks restrain companies from investing in areas like R&D, equipment, higher wages, paid medical leave, retirement benefits, and worker training.

What proposal did Republican senator Marco Rubio of Florida unveil regarding stock buybacks?

Senator Marco Rubio of Florida unveiled a proposal that would change how investors are taxed when companies buy back shares.

What is a potential concern regarding the rise in corporate debt levels coinciding with stock buybacks?

There is concern that companies are taking out debt to finance stock buybacks, which could be risky if not managed properly.

What is the counterargument from proponents of buybacks regarding the link between share repurchases and capital investment?

Proponents argue that there is no real link between share repurchases and tepid capital investment, suggesting that companies might be deferring investment for other reasons, such as pessimism about future demand or a lack of attractive investment opportunities.

How do some proponents justify the rise in buybacks despite criticism?

Some proponents justify the rise in buybacks by stating that if a company sees no profitable use of their money, they should return it to shareholders, who can then choose to invest it in more profitable ventures.

What is one way that the rise in buybacks is said to be overstated by some?

Some argue that the rise in buybacks is overstated because companies regularly issue stock as part of compensation, and the increase in buybacks has partly served to offset those new shares.

Outlines

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💹 Stock Buybacks Surge: A Driving Force in the Bull Market

In 2019, S&P 500 companies spent a record $189 billion on stock buybacks, contributing to the bull market. Despite not being the highest on record, it reflects a decade-long trend where over $5.3 trillion was spent on repurchasing shares. Critics argue that this money could be better invested in growth opportunities like new factories or R&D. However, proponents believe that buybacks are a direct way to reward shareholders. The script explains how buybacks work, their impact on Earnings per Share (EPS), and the debate surrounding their economic benefits.

Keywords

💡Stock Buybacks

Stock buybacks refer to the practice where a company purchases its own shares from the market, effectively reducing the number of outstanding shares. This is a key theme in the video, illustrating how companies on the S&P 500 have spent over $5.3 trillion on buybacks since 2010. The script mentions that in the fourth quarter of 2019, companies spent an estimated $189 billion on this practice, which is a significant part of corporate financial strategy and has been a driving force in the bull market.

💡S&P 500

The S&P 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is used as a benchmark for the overall U.S. stock market. The video discusses the actions of companies within this index, particularly their spending on stock buybacks, to highlight trends in corporate finance.

💡Earnings Per Share (EPS)

Earnings Per Share, or EPS, is a financial metric that calculates the profit allocated to each outstanding share of common stock. The video explains how stock buybacks can increase EPS by reducing the number of outstanding shares, thereby making each share more valuable. For instance, if a company has a net income of $1,000 and 100 shares, its EPS is $10; buy back 10 shares and the EPS rises to $11.11.

💡Dividends

Dividends are payments made by a corporation to its shareholders, usually as a distribution of profits. The script mentions dividends as an alternative way for companies to return money to shareholders, contrasting it with stock buybacks. While dividends provide immediate cash returns, buybacks increase the value of remaining shares by reducing supply.

💡Corporate Debt

Corporate debt refers to the money that companies borrow to finance their operations without exchanging equity. The video raises concerns about the rise in corporate debt levels coinciding with stock buybacks, suggesting that some companies might be taking on debt to fund these buyback programs, which could be risky if not managed properly.

💡Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 is a significant U.S. tax reform that reduced the corporate tax rate from 35% to 21%. The script notes that this act contributed to an increase in corporate cash reserves, providing companies with more funds that could be used for activities such as stock buybacks.

💡Capital Investment

Capital investment refers to the funds that companies spend on acquiring, maintaining, or improving their assets, such as buildings, equipment, and technology. The video discusses how critics argue that money used for stock buybacks could be better spent on capital investment to grow the company, but the script also presents data showing that business investment has gone negative since 2013.

💡Shareholders

Shareholders are the owners of a company's stock. The script emphasizes that stock buybacks benefit shareholders by increasing the value of their shares through reduced supply and potentially higher EPS. However, it also points out that executives, who are often major shareholders, benefit from rising stock prices, which can be a conflict of interest.

💡Research and Development (R&D)

Research and development, or R&D, is the process of creating new products or services through scientific research and technological innovation. The video mentions that critics of buybacks argue that companies could be investing in R&D instead, which could lead to long-term growth and innovation.

💡Executive Compensation

Executive compensation refers to the pay and benefits provided to an organization's executives. The script points out that stock buybacks can benefit executives because their stock options become more valuable as stock prices rise, which can be a controversial aspect of the practice.

💡Debt Financing

Debt financing is the process of raising funds by borrowing money, usually through loans or issuing bonds. The video raises concerns that some companies may be using debt to finance stock buybacks, which could increase financial risk if the buybacks do not yield the expected returns.

Highlights

In the fourth quarter of 2019, S&P 500 companies spent an estimated $189 billion on share buybacks, the highest in three quarters.

The record for share buybacks was set in the final quarter of 2018, with about $223 billion spent.

Since 2010, S&P 500 companies have spent over $5.3 trillion on repurchasing their own shares.

Buybacks are considered a driving force behind the decade-long bull market.

There is debate over whether buybacks are beneficial for the economy.

Critics argue that money used for buybacks could be better spent on growth opportunities like new factories.

Supporters believe buybacks return money to shareholders where it belongs.

Understanding how stock buybacks work is key to the debate.

Corporate cash reserves have been bolstered by tax cuts, high earnings, and low interest rates.

Companies have several options for utilizing their cash, including M&A, R&D, and shareholder returns.

The top 20 S&P 500 companies have bought back $1.3 trillion in shares over the past decade, with Apple leading.

Stock buybacks reduce the number of outstanding shares, increasing Earnings per Share (EPS).

A higher EPS makes stocks appear more attractive to investors.

Over one-fifth of S&P 500 companies reduced share counts by at least 4% through buybacks in the recent quarter.

Buybacks can benefit executives as rising stock prices increase the value of their stock options.

Critics claim buybacks may hinder business investment and company growth.

In 2019, senators argued that buybacks restrain companies from investing in areas like R&D and worker benefits.

There are concerns that companies are taking on debt to finance buybacks.

Proponents argue there is no clear link between buybacks and reduced capital investment.

Some believe companies should return money to shareholders if they see no profitable use for it.

The rise in buybacks may be offset by companies issuing stock as part of compensation.

Despite the debate, buybacks have become a significant aspect of American finance with no signs of change.

Transcripts

(upbeat music)

In the fourth quarter of 2019,

companies on the S&P 500 spent an estimated

$189 billion buying back their own shares

from the stock market.

It was the highest in three quarters,

but not the highest on record.

In the final quarter of 2018,

the number was about $223 billion.

A high point on a decade-long trend.

In all, since 2010, companies on the S&P

have poured more than $5.3 trillion

into repurchasing their own shares.

Analysts say buybacks have been a driving force

in the decade-long bull market.

But there's some argument about whether

they're good for the economy.

Skeptics say the money used on stock buybacks

would be better spent elsewhere,

like building new factories

or exploring new opportunities altogether.

Meanwhile, proponents say buybacks are putting money

right where it belongs, with shareholders.

To understand the debate, you have to understand

how stock buybacks work.

The debate around stock buybacks has to do with

how companies use their cash.

They have access to quite a bit of it right now.

The tax cuts in 2017, relatively high earnings

and low interest rates have all added

to corporate cash stock piles.

When a company is flush, it has options

for what to do with its money.

It can buy other companies.

It can spend on research and development.

It can buy new equipment, buildings or technologies.

Or it can return money to shareholders.

This can take the form of dividends or stock buybacks.

In the past ten years, the top 20 companies

on the S&P 500 bought back about $1.3 trillion in shares,

with Apple leading the way by far.

In a stock buyback, a company purchases its own shares

from shareholders and it takes them off the market,

leaving fewer shares outstanding.

This changes the math on the remaining shares in a key way.

It boosts a metric called Earnings per Share, or EPS.

The most basic equation for EPS is the company's net income

divided by the number of outstanding shares.

So when this number shrinks, the EPS rises.

So if a company has a net income of $1,000,

and has 100 shares outstanding, its EPS is $10.

But if it buys back 10 of those shares,

the EPS rises to $11 and 11 cents.

Higher per share earnings makes stocks look good.

And analysts at the S&P Dow Jones Indices said that

a little more than one in five companies on the S&P 500

reduced share counts by at least four percent

through buybacks in the most recent quarter,

boosting earnings per share.

Stock buybacks can be a good deal

for remaining shareholders.

They tend to benefit executives because rising stock prices

make their stock options more valuable.

This is one of the criticism of stock buybacks.

The people who decide what to do with the extra cash

often stand to benefit.

Skeptics say that money is better used

on growing the company.

Here's a chart that looks at the change

in business investment since 2013.

You can see it's gone negative three times.

Critics of buybacks say the practice is partly to blame

for the lagging business investment.

In 2019, Democratic senators Chuck Schumer

and Bernie Sanders argued that buybacks restrain companies

from investing in R&D, equipment, higher wages,

paid medical leave, retirement benefits and worker training.

And Republican senator Marco Rubio of Florida

unveiled a proposal that would change how investors

are taxed when companies buyback shares.

Analysts also say that another worrying sign

is that buybacks have coincided with a rise

in corporate debt levels.

Some worry that companies are taking out debt

to finance the stock buybacks.

Proponents of buybacks say there's no real link

between share repurchases and tepid capital investment

and that companies could be deferring investment

for other reasons.

Maybe they're pessimistic about future demand

and economic growth and they don't see

attractive investment opportunities for the company.

This camp says that if a company sees

no profitable use of their money,

they should return it to shareholders

who then have the choice to invest it

on more profitable ventures.

Some also say the rise in buybacks is overstated.

Companies regularly issue stock as part of compensation

and the rise in buyback has partly served

to offset those new shares.

As this debate continues, one thing is clear.

Buybacks are now a big part of the landscape

of American finance.

There's no sign that that's about the change.