New Haven Register (Sunday) (New Haven, CT)
Prolific corporate stock buybacks stir debate
Some of southwestern Connecticut’s largest companies have earmarked hundreds of millions of dollars in recent weeks for the same target — their own stock.
Those moves reflect a nationwide surge in stock buybacks since the 2017 U.S. tax reform, which significantly cut the corporate tax rate. Executives said the share repurchases reflect their desire to use their gains to increase value for shareholders, but the practice has sparked criticism from some Congressional leaders who argue that the strategy exacerbates income inequality and undermines longterm economic growth.
“There is a clear connection between this peak in buybacks and the tax cut that the president signed in 2017,” said Chinmoy Ghosh, head of the finance department in the University of Connecticut’s business school. “It created a major cash inflow for many companies, and one of the resulting uses has been to buy back stock and give back some of the money to shareholders.”
Focus on shareholders
Many corporate bottom lines ballooned in the wake of the tax overhaul, which lowered the corporate tax rate from 35 percent to 21 percent.
U.S. companies responded last year by using their windfalls to repurchase a record $1 trillion of their own shares. The total exceeded the annual gross domestic product of all countries not among the world’s 16 largest national economies.
The proliferation of buybacks has extended into the new year.
Greenwich-based XPO Logistics announced last week it would repurchase up to $1.5 billion of its common stock. A week earlier, the company completed repurchasing 18 million shares, for a total of about $1 billion.
Those buybacks represent a pivot for a firm that has forged its growth through buying other businesses. Between 2011 and 2015, the company made 17 acquisitions.
“M&A is in our corporate DNA, there’s no question about that,” XPO CEO Bradley Jacobs said on a Feb. 15 call with investment analysts. “We have a very good track record with creating significant shareholder value through M&A. But today… the best M&A target is acquiring our own stock. That’s where we’re going to deploy our resources for the foreseeable future.”
On Feb. 7, Stamford-based WWE announced a program to repurchase up to $500 million in stock.
“The stock-repurchase program underscores our commitment to the company’s shareholders,” WWE Co-President George Barrios said on a Feb. 7 call with investment analysts. “The deci-
sion was supported by WWE’s strong financial performance and demonstrates our confidence in the company’s future.”
Two days earlier, Stamford-based Pitney Bowes said it would repurchase $100 million of its shares.
Stamford-based United Rentals, another prolific buyer of other companies in recent years, is also focusing increasingly on buybacks. Last December, it announced that it would resume its $1.25 billion repurchase program.
The program started last July, with $210 million of shares purchased through last September. United then paused the program last November to focus on the integration of its $2.1 billion acquisition of equipmentrental firm BlueLine.
Companies are using a range of sources, including cash on hand and bonding, to pay for the buybacks. Pitney has reduced its stock dividend to finance its latest repurchases, although it said doing so would not change the amount of capital expected to be returned this year to shareholders.
Mixed results
Buybacks represents one
of the main tools for boosting stock value. They reduce share supply, in turn raising share prices. They also entail less of a longterm commitment than increases in stock dividends, which companies are generally reluctant to reverse.
“We believe that Pitney Bowes (stock) is undervalued and that share repurchase is an attractive investment at this time,” Pitney CEO and President Marc Lautenbach said on a Feb. 5 call with investment analysts.
Pitney shares closed Friday at around $8. The price lags a 52-week high of about $13.
But in a market that has dealt with sharp fluctuations in recent months, buybacks have not assured an immediate price spike.
United shares closed Friday at about $137, compared with a 52-week high of about $190.
XPO’s shares dropped Feb. 15, by more than 10 percent, to about $51. The decrease came a day after the company missed its fourth-quarter earnings targets and announced reduced business from its largest customer, which is widely believed to be Amazon. Its stock closed Friday at around $52.
The S&P 500 Buyback Index — which comprises the 100 companies within the main S&P 500 index with the highest buyback ratios — ended 2018 with an 8.7 percent annual decline in its value. The main S&P 500 finished last year with total returns down 4.4 percent year-over-year.
Growing debate
The proliferation of share buybacks has sparked concerns among some lawmakers on Capitol Hill that repurchases disproportionately benefit executives and affluent shareholders and come at the expense of companies’ rank-and-file workers.
In a New York Times op-ed earlier this month, U.S. Sens. Charles Schumer, D-N.Y., and Bernie Sanders from Vermont, who announced this week his second run for president, said they planned to introduce legislation that would prevent companies from buying back stock unless they first invested in workers and communities.
They advocate for initiatives including a $15-perhour minimum wage, seven days of paid sick leave, “decent” pensions and “more reliable health benefits.”
“Why wouldn’t it be better for our national economy if, instead, of buying back stock, corporations paid all of their workers better wages and provided good benefits?” Schumer and Sanders wrote, in part, in the op-ed. “Why should a company whose pension program is underfunded be able to buy back stock before shoring up the pension fund?”
Companies buying back stock counter that they are still investing in their workers through wage increases and comprehensive benefits packages.
XPO announced last week a new program to support pregnant employees and their employees. Some critics of the company, such as U.S. Sen. Richard Blumenthal, D-Conn., said they were still skeptical of the company’s intentions, citing alleged worker mistreatment at an XPO warehouse in Memphis, Tenn.
In January 2018, Pitney Bowes said it would commit more than $18 million annually to raise wages of most of its U.S. hourly employees. But the company also said at the same time, that it planned to cut costs by $200 million during the next two years — 60 percent of which would be “people related.”
Pitney Bowes officials have since declined to comment further on the “people-related” savings.
“There is definitely some argument to be made that buybacks benefit a small portion of the population because not everybody owns stock,” said UConn’s Ghosh. “But it’s part of a bigger issue about how the wealth that is created in this country is distributed.”