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Once again, Stock buybacks by corporations are in the news. The WSJ has an article on it today:
American Companies Are Buying Their Own Stocks at a Record Pace
Buybacks are expected to top $1.1 trillion in 2025, led by big banks and tech firms
…Both companies and investors often applaud buybacks because the practice reduces the number of shares available to trade, driving up earnings per share and often boosting stock prices.
But the practice is controversial in some quarters, with skeptics contending that repurchases serve to prop up the market at a time of already stretched valuations. Some analysts worry that the preference for buybacks over longer-term commitments such as investing in factories or offering dividends suggests President Trump’s trade war stands to weigh on growth over time.
Skeptics also say companies tend to repurchase shares when they are rising rather than when they are relatively cheap, making buybacks an inefficient use of extra cash.
A quick primer and history:
Share buybacks are popular with corporations because reducing the amount of shares outstanding increases the price of shares, acting as an unrealized gift to existing shareholders and corporate management (over the years, C-Suite compensation has morphed from primarily salary to primarily holding of company shares)
In 1934, the Securities Exchange Act created the SEC (Securities Exchange Commission) and made certain manipulative practices illegal - including most buybacks
Up until 1982, share buybacks were considered as market manipulation and mostly avoided by corporations for fear of investigation by the SEC
In 1982, under our favorite President Ronald Reagan (much if the economically bad stuff happening today started with that doddering but smiley old fool), a new “Safe Harbor” rule was put in place by the SEC that effectively made share buybacks “legal”
Since then, share buybacks have skyrocketed, in many instances taking the place of old-fashioned dividends paid to shareholders. bonus graph below (notice the inflection point in 1982):
I debated my Senate opponent in 2018 about the first Trump tax cuts. He insisted the cuts would increase corporate investment. I disagreed. Sadly, in some sense, I was wrong and he was right. Corporate investment did increase, just not in the way he expected (but in a way I explicitly suspected); instead of increasing investment in research, development, products and services, corporations increased investment in their management’s and shareholder’s personal wealth. Brilliant!
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