Lawmakers on both sides of the aisle have recently criticized stock buybacks, including Sen. Chuck Schumer (D-NY) and Sen. Bernie Sanders (I-VT) in a New York Times op-ed and Sen. Marco Rubio (R-FL) in a tweet storm about his plans to release legislation on the subject. As the Tampa Bay Times notes, this is something “you might expect from Bernie Sanders or Elizabeth Warren, but not necessarily the Florida Republican.”
These objections to stock buybacks are, in a word, misguided. Critics’ complaints rest on the premise that they maximize shareholder earnings to the detriment of workers and at the expense of investments in the company. But this reflects a fundamental misunderstanding of how stock buybacks work and what drives business leaders’ decisions about spending profits and deploying capital.
Now is a good time to take a closer look at stock buybacks: what they are, what they do, what motivates a company to make investment decisions, and who benefits when companies buy back their stock.
First of all, what is a stock buyback? When a company turns a profit, one basic way to address the balance is to buy back shares; it’s a common mechanism for companies to distribute earnings to shareholders. The alternatives are to increase investment or pay out more in dividends, the latter of which is functionally identical to buying back shares.
From here, let’s set the record straight with three things you need to know about stock buybacks.
1. Companies don’t choose stock buybacks over reinvesting in the company.
Businesses make the most productive decisions they can based on the capital they have. In fact, S&P 500 firms have increased their R&D and capital expenditures as a percentage of revenue over recent years, and R&D spending is at a record high. Following the passage of last year’s tax reform package, companies have increased hiring, given employees bonuses and raises, and increased or expanded benefits for employees.
2. Stock buybacks don’t just benefit company executives and the wealthy. They benefit everyday Americans and retirement account holders.
Fifty percent of Americans are invested in the stock market, and four in 10 dollars invested in the stock market are held in retirement funds. Stock buybacks, like dividends, are a common way to distribute earnings to these investors. Shareholders often reinvest gains from buybacks into growing new businesses and creating jobs, which means that proposals to restrict or discourage buybacks would ultimately be detrimental to American families and the U.S. economy.
3. Stock buybacks help the broader economy by delivering cash to companies that need capital.
S&P 500 firms account for less than 50% of business profits and less than 20% of employment. Capital that flows to shareholders of these companies can be invested in innovative public and private companies of all sizes that are starving for capital. And by the way, small businesses drive a great deal of job growth in this country.
There are a lot of policy issues impacting the U.S. business community that deserve lawmakers’ immediate attention — like infrastructure modernization, immigration reform, and passing new trade agreements. Raising barriers to distributing earnings would only encourage companies to hold on to excess balances that could otherwise be put to more productive use. Instead, allowing companies and investors to efficiently deploy capital throughout the economy — without the heavy hand of one-size-fits-all government mandates — will lead to the best outcomes for workers, American companies, and the U.S. economy.