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US share buybacks at records despite congressional griping
NEW YORK, Dec 23, 2018 (BSS/AFP) – US corporate share repurchases keep
setting new records, a trend some experts expect to persist despite
bipartisan unease on Capitol Hill and a weaker economic outlook that could
crimp profits.
Fueled with windfalls from the 2017 tax cut and cheap debt, companies in
the S&P 500 spent $203.8 billion buying back their own stock in the third
quarter, the third consecutive new record, according to S&P Dow Jones
Indices.
Stock buybacks boost share prices and make profits look bigger by
increasing earnings per share, a key Wall Street benchmark.
Boeing shares rose nearly four percent on Tuesday after it announced it
was boosting its share repurchase plan to $20 billion from $18 billion and
increasing its dividend.
But those share repurchases are financed by funds that might otherwise go
to hire workers or invest in new projects, which could create more jobs.
Critics include Republican Senator Marco Rubio, who plans to introduce tax
legislation to discourage buybacks in favor of business investment that
restores “the dignity of work.”
The proposal would allow firms to deduct the cost of a new factory, “but a
company that wants to use its tax cuts to buy back its own stock wouldn’t get
any additional tax benefit,” Rubio wrote in The Atlantic magazine.
General Motors also drew the ire of lawmakers after it announced last
month that it would shutter five North American factories and cut thousands
of jobs while still buying shares.
Democratic Senators Amy Klobuchar, Chris Van Hellen and Tammy Duckworth
called on the automaker to suspend some $3.4 billion in share repurchases,
saying “these buybacks give a windfall to GM’s executives and stockholders,
while diverting cash flow that GM could use to invest in electric and
autonomous vehicles without laying off American workers.”
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Critics often blame the 2017 tax cut championed by President Donald Trump,
which he billed as a tool to boost economic growth.
– Benefits ‘skewed’ to wealthiest –
The vast majority of stock is owned by the wealthy, with some studies
showing the top 10 percent of Americans holding more than 90 percent of the
stock.
The value of buybacks is “extremely skewed towards the top,” said Josh
Bivens, research director of the Economic Policy Institute, a labor union-
backed think tank.
Bivens views the buyback boom as a “symptom” of the problem of
“corporations not having good ideas about how to invest all the savings
available to them.”
Bivens, who favors stronger public investment in education and
infrastructure, is skeptical the talk on Capitol Hill will lead to concrete
steps.
“I have a hard time seeing particularly aggressive actions on (buybacks)
anytime soon,” Bivens told AFP, noting that “corporate executives tend to get
their way on Capitol Hill.”
But business groups contest the notion that share buybacks only benefit
“corporate bosses.”
“A majority of all American families own stock, either directly or
indirectly, through mutual funds, pension funds, and retirement accounts,”
Business Roundtable President Joshua Bolten said in a column.
“Just as important, money returned to shareholders of any kind
recirculates throughout the economy.”
– Pullback ahead? –
Some market watchers think the buyback boom could ebb if the economy
slows. On Tuesday, FedEx officials said they were weighing whether to
purchase additional shares as they slashed their profit forecast due to
weakness in China and Europe.
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And Lowe’s saw its debt rating downgraded by S&P after a December 12
announcement of a new $10 billion share repurchase program, due to
expectations of higher debt levels.
Frances Donald, head of macroeconomic strategy at Manulife Asset
Management, said a pullback in buybacks could be a drag on stocks in 2019.
“What do we do if these companies are no longer engaged in this activity?”
she said. “That could have implications.”
But Howard Silverblatt, senior index analyst at S&P Dow Jones Indices,
noted that a decline in stock prices permits companies to buy back shares
more cheaply. He expects buybacks to remain high, even if not at record
levels.
“Once you give it, it’s hard to take it back,” Silverblatt told AFP. “It’s
gratification and support of your stock.”
DataTrek Research’s Nicholas Colas noted that buybacks plummeted in 2009
just after the financial crisis, but quickly recovered. Companies in 2010
allocated 43 percent of their operating earnings to buybacks, and have
averaged 51 percent from 2010 to 2017.
Buybacks “won’t go away in a garden-variety recession,” Colas said in a
note last month.
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