Buybacks: A corporate spending spree?
Stock buybacks have continued at a record pace in 2022, said Nicholas Megaw in the Financial Times. According to Goldman Sachs data, companies authorized $319 billion in shares to be repurchased through March, putting them on pace to shatter last year’s $882 billion record. While the total paid out does not yet match the money spent on dividends—$1.4 trillion in 2021— buybacks are increasingly becoming corporate America’s preferred way of rewarding shareholders. Buybacks cut the number of shares in circulation, increasing per-share earnings and raising the stock price. “Even recently listed companies, which traditionally spend cash to fuel growth rather than return excess to shareholders, have joined the trend as sharp drops in their stock prices make repurchases more attractive.” But the flood of buyback announcements has revived debates about their merits, said Andrew Ross Sorkin in The New York Times. The Biden administration recently proposed that corporate executives be required to hold on to their shares for three years after a buyback, citing recent research that “CEOs tend to sell far more stock in days following a buyback announcement.”
So much for “stakeholder capitalism,” said Judy Samuelson in The Hill. CEOs can talk all they want about “the importance of their workforce and commitments on climate,” but the numbers tell a different story. Consider Target, which received plaudits for announcing a $300 million plan to boost employee retention by raising wages to $24 per hour in some markets. Six months earlier, the retailer had approved a $15 billion program of stock buybacks. Some corporate leaders are finally recognizing the outrageousness of such indulgence, said Paul Constant in Business Insider. Starbucks’ longtime head Howard Schultz, who returned as interim CEO, suspended the firm’s $20 billion repurchasing plan in order to “invest more profit into our people,” like baristas. The announcement was criticized by some Starbucks workers who considered it a tactic to prevent employees from unionizing. However, “by tying worker pay directly to stock buybacks, Schultz delivered a remarkable acknowledgment that workers have been shut out” of corporate America’s profits.
Companies have always returned roughly the same share of their profits to shareholders, said Spencer Jakab in The Wall Street Journal, only it was primarily done in the form of dividends, “the bread and butter of retirees.” However, with buybacks, unlike with dividends, shareholders don’t have to pay taxes until they sell their shares. “The most legitimate criticism of stock buybacks is that corporate executives are awful market timers.” Boards tend to authorize buybacks “when the wind feels at their backs.” For instance, last year buyback activity rose 107 percent in the fourth quarter, right before the market started sliding.
That correlation should make investors nervous.