The effort to shore up U.S. businesses battered by the coronavirus pandemic has brought new attention to the single biggest investment most big companies have made over the past decade: their own stock. The defenders of share buybacks say it’s often the most efficient use of capital. Critics say it has left firms vulnerable to the kind of shock the virus has produced. Either way, it’s been a vital support for equities -- but one that will probably be sharply curtailed for a while, for both economic and political reasons.
1. How big have buybacks been?
The past two years have been the busiest on record, according to a report by S&P Dow Jones Indices. Companies flush with cash from a 2017 tax cut bought back a record $806 billion of shares in 2018, a figure that slipped to $729 billion in 2019. For members of the S&P 500 Index, buybacks have exceeded dividends in every quarter since 2010.
2. What’s happening now?
Buybacks started to slow in the beginning of the year, with U.S. repurchases totaling $122 billion in January and February, down 46% from a year earlier, according to the report. This slowdown -- which coincided with a peaking stock market -- gathered pace in recent weeks as a growing number of companies across the world suspended the practice to conserve cash. The S&P report described second-quarter prospects as “dismal” and said buybacks may be slow to come back due to potential government restrictions as well as public-image concerns.
3. Who’s pulling back?
Eight giant U.S. banks responsible for some of the largest buybacks globally in the past year, including
4. What do buybacks have to do with stimulus packages?
In short, it’s the horrible optics of a company using money from the government to enrich shareholders. Buybacks have been denounced by both the right and the left. President
5. What was decided?
A bipartisan bill agreed to in the Senate included a requirement that any company receiving a government loan would be
6. How did buybacks get so big?
Against the backdrop of President
7. Companies borrowed to buy stock?
Yes. In the Reagan-era worldview, this was good: Tax breaks made debt a cheaper form of financing, and the need to make regular interest payments could focus executives’ minds on generating more cash. Over the next few decades, the stock market’s perceived function -- raising money for business ventures -- was turned on its head, as stocks became a vehicle largely for returning money to shareholders. Any gain in the share price caused by a buyback goes untaxed as long as the shares aren’t sold, and capital gains are also usually taxed at lower rates than dividends.
8. What’s the benefit of buybacks beyond making shareholders richer?
Proponents argue that if managers can’t see a better opportunity for profitable investment, perhaps there isn’t one. Buybacks are thus seen as a good vehicle to get funds out of the hands of executives who might otherwise waste them on pet projects and speculative investments.
9. What are the arguments against?
Some critics, including Warren and U.S. Democratic presidential candidate
10. Is this an issue elsewhere?
While the U.S. leads the way in both the amount of buybacks and the intensity of political scrutiny, the practice isn’t unknown in Europe or Asia. In Japan, electronics powerhouse
The Reference Shelf
- In 1986, Michael Jensen published a seminal paper on the advantages of paying cash to shareholders.
AQR Capital Managementauthors take aim at some popular criticisms of buybacks.
- Roosevelt Institute paper examines whether corporate insiders use stock buybacks for personal gain.
- Economist William Lazonick assesses the economic drawbacks of share repurchases.
- Economists at the University of Illinois link share buybacks to investment and jobs.
- International Monetary Fund warned in October that debt-funded payouts can considerably weaken a firm’s credit quality.
- A Harvard Business Review article makes the case for buybacks as promoting innovation.
- J.W. Mason of the Roosevelt Institute explores whether share buybacks broke the link between borrowing and investment.
- Researchers describe the history of share-buyback regulation.
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John O’Neil, Brendan Walsh
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