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.