Corporate America wants Sens. Bernie Sanders, I-Vt., and Chuck Schumer, D-N.Y., to know there’s another side to their claim that rewarding investors with higher dividends and stock buybacks benefits the wealthy at the expense of the working class.
“Returning some profits to shareholders is not necessarily a bad thing,” Josh Bolten, president of the Business Roundtable, and Ken Bertsch, executive director of the Council of Institutional Investors, wrote in an op-ed for the New York Times published Sunday. “Some critics of buybacks miss this point: Money returned to shareholders through buybacks and dividends does not disappear from the economy.”
Individual investors, for example, can spend it on large home purchases they’ve been saving for, while larger shareholders like companies might lend it to other firms that are hiring and growing, they said. The cash can also be “invested in new businesses as seed money for start-ups or financing for emerging technologies,” the two noted.
Their rebuttal comes a month after Schumer, the Senate’s top Democrat, and Sanders, one of several candidates seeking the party nomination to run against President Trump in 2020, said they would draft a bill to block buybacks from companies not offering their employees such benefits as minimum pay of $15 an hour, healthcare insurance, and fully funded pensions.
Curbing stock buybacks, which have been seized on by critics as evidence that corporations are rewarding themselves and their owners rather than expanding their operations and creating new jobs after the 2017 tax cut, is designed to appeal to middle- and low-income employees who have benefited less from 10 years of economic expansion than their wealthier peers.
[Related: Jamie Dimon: Criticism of stock buybacks is ‘basic ignorance’ of economy]
Corporate America, which in decades past cared about workers and communities, now serves only shareholders, argued Schumer, the Senate’s minority leader. Executives are focused on driving up stock prices with no help for workers, he said in a Facebook video, “and the way they’ve done that, more than anything else, is with these stock buybacks.”
The two didn’t propose any specific action on dividends. While stock buybacks may be an arcane topic outside Wall Street, the practice is a straightforward one. To understand it, keep in mind that the value of a publicly-traded corporation is determined by adding together the price of each of its outstanding shares; if the price of an individual share changes, so does the firm’s.
One way CEOs and corporate boards who believe their company’s price is too low can push it back up is by repurchasing shares from investors.
That not only returns cash to shareholders who may have grown disenchanted with their stock, it also, in theory, drives up the share price by creating extra demand — in much the same way the Federal Reserve buoyed markets by buying trillions of dollars in government bonds after the financial crisis.
There’s another benefit, too. The pay of high-ranking corporate executives is typically tied to profit growth, often measured in earnings per share, an artificial construct that divides net income by the number of outstanding shares.
In periods when a corporation’s income isn’t growing, or is growing less than investors expect, repurchasing shares reduces the number outstanding and nudges per-share earnings higher. If, for example, a company with 100,000 shares garnered net income of $1 million a year, it would report earnings of $1,000 a share. By repurchasing 50,000 of the shares, its management could boost net income to $2,000 a share.
[Related: Tax overhaul fuels Apple’s $100 billion stock buyback]
While acknowledging the practice can be abused, the Business Roundtable and the Institutional Investors council noted buybacks also buoy the retirement savings of the majority of American households that own stock through pensions or investment accounts.
Consequently, the Democrats’ proposal to limit the practice — and others similar to it — are more likely to undermine economic security than accomplish their stated goal of fostering inclusive economic growth. The Business Roundtable represents CEOs of the 200 largest companies in America, while the Institutional Investors council is made up of pension funds and endowments that invest a combined $4 trillion in U.S. financial markets.
It’s also a mistake to assume that the record $1 trillion that U.S. corporations authorized for share repurchases in 2018 came at the expense of pay raises, new factories and other investments that Congress hoped the tax cuts would foster, the two groups said. JPMorgan Chase, Walmart, and CVS Health all raised pay for entry-level workers, for example.
[Also read: Sanders to introduce bill to force Walmart to pay $15 minimum wage]
And a review of regulatory filings for companies in the S&P 500 shows “those that repurchased stock in the first three quarters of 2018 tended to engage in more capital expenditures and research and development investment than those electing not to do buybacks,” Bolten and Bertsch wrote. “American companies invested nearly $3 trillion in the economy during 2018, including $460 billion in research and development. And the firms doing the largest buybacks are also the ones doing the most capital investment.”
