Why ending stock buybacks is bad for everyone

There is a trickle-down effect that would end

Will Rogers, legendary 1920s and 1930s Democratic political comedian, said: “I don’t make jokes. I just watch the government and report the facts.”

Here’s a quickie he would love: Portland, Ore., whose motto is “Keep Portland weird,” just brought in a new police chief named Outlaw.

Rogers would say you can’t make up stuff that funny.

A sick joke Rogers wouldn’t like is S.B. 2605, the “Reward Work Act.”

It’s a bill to prohibit companies from repurchasing their own shares on the open market. This idiotic law would be a double whammy to stock prices — raising supplies of shares while cutting demand. Not funny.

Stock buybacks aren’t evil. They’re great — for everyone. When firms repurchase shares, they destroy stock supply. Econ 101 taught us supply and demand move prices. Shrinking supply? Bullish!

Destroying shares boosts per-share earnings, which investors love (same earnings, fewer shares). By returning capital to shareholders, they can invest elsewhere, funding other ventures. Buybacks speed investment to its best, most productive use. What’s not to love?

According to politicians, everything! S.B. 2605 stems from a post-tax reform buyback backlash. Recently, Sens. Ron Wyden, D-Ore., Robert Casey, D-Pa., and Sheldon Whitehouse, D-R.I., unveiled a politicized report showing companies had repurchased $100 billion in stock in 2018, while only 2% of workers claimed tax cuts motivated their boss to cough up a raise or bonus.

The implication: Tax cuts were gravy for shareholders and fat cats, not workers. The solution, courtesy of Sens. Tammy Baldwin, D-Wis., Brian Schatz, D-Hawaii, Kirsten Gillibrand, D-N.Y., and Elizabeth Warren, D-Mass.: Ban firms from buying their own stock in the open market.

Instead, they’d have to use formal tender offers, an arduous process.

This supposes some false choice between buybacks and raises. Resources aren’t that limited. CEOs aren’t divvying up some small, fixed kitty. Buybacks are investments. Most investments are debt-financed.

Pretend you’re a board member. Pretend I’m the CEO. Here is my idea: We borrow for seven to 10 years at 4%, pretax (the going BBB corporate rate — about 3.2% after tax). We use it to buy back our own stock. Our earnings yield, or earnings divided by stock price, is

6.1% — the inverse of the Standard & Poor’s 500’s current forward P/E ratio. That’s the after-tax return we’d get forever if our earnings never rose or fell. So

6.1% minus 3.2% renders 2.9% extra free money. Pure profit! Should we?

Better yet, because we borrowed, we still have all our prior cash. We can give high-performing workers bonuses and raises. Or raise starting wages to attract stellar talent. Or ramp up R&D or open new plants. Or some of all of that.

It’s lunacy to think curtailing buybacks will make wages soar. Sorry, not how it works. Wages result from the supply of and demand for equivalent la- bor. Firms have a duty to shareholders to maximize profits. If they don’t need to raise wages to keep and hire good talent, they won’t.

End open-market buybacks, and you end handy earnings fuel. That’s bad for everyone — shareholders, CEOs and workers alike. It restricts firms from returning cash to shareholders. This whacks investment elsewhere. Buyback bucks don’t slither into some void. They get spent and re-spent, invested and reinvested. Shareholders can take the money and invest in a start-up — paying programmers and facilities staff. Or they buy other stocks or bonds, pushing those prices up. All good! But banning buybacks banishes all wonderful chain reactions. Almost everyone suffers.

Well-intended major legislative changes that interfere with basic asset allocation decisions and capability discourage corporate and personal risktaking — central to American innovation. See my April 1 column.

Ken Fisher is the founder and executive chairman of Fisher Investments and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter @KennethLFisher

The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.

S.B. 2605 would be a double whammy to stock prices — raising supplies of shares while cutting demand.