Senate liberals are giving corporations an ultimatum: Do what we want or face the consequences. What are the ramifications of not caving to the mob-like mentality of the Democrats and left-leaning politicians? A restriction on corporate share buybacks, a common business practice in which a company purchases its own shares – a fiendish act, as critics often say.
Writing in The New York Times, Senators Charles Schumer (D-NY) and Bernie Sanders (I-VT) outlined their proposal to impose “preconditions” on share repurchases:
“Our legislation would set minimum requirements for corporate investment in workers and the long-term strength of the company as a precondition for a corporation entering into a share buyback plan. The goal is to curtail the overreliance on buybacks while also incentivizing the productive investment of corporate capital.”
These preconditions involve instituting a $15 minimum wage, extending health benefits, and giving paid time off. They say this is necessary because businesses are choosing to pocket their profits rather than invest in the workforce, exacerbating income inequality. The two men are mirroring an initiative that was submitted last year by Senator Tammy Baldwin (D-WI), who asserted that they divert resources away from employees.
Of course, since politicians always want more, you can bet that if this legislation passes, then you can expect the requirements to only increase to account for other progressive goodies. Transgender surgeries, Mondays and Fridays off, and a $33 minimum wage will eventually be demanded.
So, is this really as iniquitous as suggested by both the left and the right? Kevin Hassett, the chief White House economic advisor, was correct when he wished “some economist would go and talk to these guys on how buybacks work.”
First, what the heck is a stock buyback, or share repurchase, anyway? You can think of it as a company reinvesting in itself, using a tender offer (premium) or the open market to acquire these shares. This reinvestment option has plenty of permutations, from reversing undervaluation trends to consolidating ownership. For the most part, it occurs when firms feel they have met their obligations, or they have exhausted all investment opportunities.
Why waste resources when this capital can be better used elsewhere?
Public companies sell shares to raise equity capital to fund expansion efforts. However, if there aren’t any growth opportunities on the horizon, maintaining unused equity funding on the balance sheet costs the organization money and sharing ownership does not provide any benefits. When entities have an excess of unused cash, which can be expensive, then there will be a tidal wave of buybacks.
Why waste resources when this capital can be better used elsewhere? A 2016 study found that firms that repurchase stock beat their peers by more than 12% in the succeeding four years. In addition, a separate study discovered that in poorly governed corporations, $1 of uninvested cash is valued as low as $0.42 – just think what could have been done with a full buck.
In addition to boosting the share price, there are plenty of other advantages of doing this:
- Incentivize investors to put their money in the market and increase capital investment.
- Signal to traders that management believes the market has discounted the stock too far.
- Pad financial ratios, like earnings per share (EPS), that will raise the stock.
- If it’s favored over dividends, then fewer of these transactions during down times could preserve capital and the share price.
- They are taxed at a lower capital-gains rate, which gives the Treasury less money (always a good thing).
- Capital allocation can enable shareholders to invest in younger firms with great potential.
Buybacks have many uses – for both short-term impacts and long-term economic growth. Despite the immense supply of articles slamming this common measure, they do not pass the smell test. The main argument is that this maneuver harms the economy in the long-run, which is untrue because they can foster long-term investment for small-cap companies.
Corporations Still Investing
The senators and other leading Democrats are disingenuous when they contend that executives are pocketing the tax cuts. While there have been some cost-cutting initiatives and streamlining of operations, Corporate America has done its part in elevating its workforce.
As Liberty Nation reported in the aftermath of the Tax Cut and Jobs Act (TCJA), the greedy and evil Monopoly men did not take the money and bury it in the Cayman Islands. A lot of businesses, from retail giants to Wall Street titans to telecom juggernauts, hiked their minimum wages, handed out bonuses, reinvested in workplace infrastructure, and implemented job-training programs.
House Speaker Nancy Pelosi (D-CA) may think these are crumbs, but these efforts went a long way to boost living standards, lift up personnel, and Make Corporate America Great Again.
When leftists claim that buybacks “create a sugar high for corporations” at the risk of future investments, it suggests a great confusion of business, economics, and finance. You cannot fault the average person for misunderstanding this repurchasing tactic – they aren’t exactly topics for discussion at the dinner table. Indeed, slamming the 1% is a stupendous strategy to appeal to the lowest common denominator in politics, but ignorance should not be an excuse for terrible public policy.