Andrew Jackson, the 19th-century populist whose portrait now hangs in President Trump’s Oval Office, didn’t make his mark on history by mincing words.
When a government enacts laws diverting riches and power to its elite, the seventh president observed while vetoing a precursor to the Federal Reserve in 1832, “the humble members of society — the farmers, mechanics, and laborers — who have neither the time nor the means of securing like favors to themselves, have a right to complain.”
It’s precisely the class-warfare tactic used by Jackson, whose campaign style Trump has compared to his own, that two members of the Senate minority are employing against stock buybacks.
Often used by CEOs to woo investors, the repurchases surged to $1 trillion after a GOP-led tax cut in Trump’s first year, Sens. Chuck Schumer and Bernie Sanders said. If reining them in happens to also undermine the tax cut, a signature accomplishment of the White House that has proved less popular with voters than on Wall Street, Schumer and Sanders see that as a bonus.
A bill the two are drafting that would block buybacks from companies not offering their employees such benefits as minimum pay of $15 an hour, healthcare insurance, and fully funded pensions is “the beginning of holding corporate America accountable to make sure that workers in this country receive decent wages and decent benefits,” Sanders explained in a Facebook video.
A Vermont independent who caucuses with Senate Democrats and sought the party’s nomination for president in 2016, the 77-year-old has indicated he may try again in 2020, joining a field of liberal candidates embracing causes from universal healthcare to giving workers more input in corporate decision-making.
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.
“What we’re saying is, ‘Treat your workers with respect,'” Sanders said.
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, “and the way they’ve done that, more than anything else, is with these stock buybacks.”
While the term may be arcane 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.
“It outrages me that these companies do buybacks when they haven’t fulfilled their pension obligations, which they owe,” Schumer said. More benefit has to go to the workers, he argued: “It’s better for the companies, better for the workers, and better for America.”
While businesses did invest in both employees and new plants after last year’s tax cut — JPMorgan Chase, Walmart, and CVS Health all raised pay for entry-level workers, for example — the money that U.S. corporations authorized for share repurchases in 2018 was more than ever before, according to TrimTabs, an independent investment research company that tracks stock-market liquidity.
The $1 trillion marks an increase of 69 percent from the year before the tax cut took effect and tops a previous record of $779 billion in 2015.
It’s a trend Securities and Exchange Commissioner Robert Jackson, a Trump appointee, noted when he argued that companies should limit the ability of executives to sell their own shares during a buyback.
“We need our corporations to create the kind of long-term, sustainable value that leads to the stable jobs American families count on to build their futures,” he said in a speech last summer. “Corporate boards and executives should be working on those investments, not cashing in on short-term financial engineering.”
Less than a year after Jackson’s comments, Sears creditors are accusing former CEO Eddie Lampert and his hedge fund ESL Investments of using buybacks to strip the century-old retailer of its worth before its bankruptcy filing late last year.
But if buybacks can be misused, they are also a valuable tool.
Wall Street maintains that returning cash to investors is only fair when a company lacks a higher-return option for putting the money to work.
“Stock buybacks are a way for shareholders to realize return,” said Caroline Harris, vice president for tax policy and economic development at the U.S. Chamber of Commerce, which represents more than 3 million businesses. “They benefit the 50 percent of Americans who are investors, such as retirees or families looking to save for the future. This legislation is aiming to fix a problem that simply doesn’t exist.”
Corporate leaders concur. Planemaker Boeing, the largest U.S. manufacturer, bought back 26 million of its shares for $9 billion last year, and its board recently approved spending another $20 billion the same way. JPMorgan, the country’s biggest lender, spent $5.7 billion on repurchases in the last three months of 2018 alone.
“It’s a tremendous error to think there’s something wrong with stock buybacks and dividends,” CEO Jamie Dimon said last summer amid questions about how corporations were spending the cash freed when Congress lowered the top corporate tax rate to 21 percent from 35 percent.
“It’s a natural function of capital markets and a proper deployment of capital,” he added. “Individuals might use it to buy a home; companies might deploy it as venture capital. I don’t understand how anyone can say that’s a bad thing. It’s coming from people who are ignorant about how capital markets function.”
Lloyd Blankfein, the former head of investment bank Goldman Sachs, concurred. “A company used to be encouraged to return money to shareholders when it couldn’t reinvest in itself for a good return,” he observed on Twitter. “The money doesn’t vanish, it gets reinvested in higher-growth businesses that boost the economy and jobs. Is that bad?”
