“When you were told all that [stock] Repurchases are harmful to shareholders or the country, or more profitable to CEOs, you are listening to an economic illiterate or a demagogue with a silver tongue (characters that are not mutually exclusive ). – famous investor Warren Buffett.
“Corporations must do the right thing. That is why I propose that we quadruple the tax on corporate stock buybacks and encourage long-term investments.” – President Biden in his State of the Union address.
Do stock buybacks hurt the country by discouraging long-term investment?
A corporation with excess cash has many options. It can:
• Invest back into the business by upgrading existing plant and equipment.
• Expanding the productive capacity of the existing business.
• Develop new products and services.
• Make claims.
• Pay workers more.
• Increase dividends to shareholders.
• Keep money safe in rainy season.
• Buy back stock.
When a company buys back stock, the money is not lost. The shareholders who sell will receive cash that they can spend or invest elsewhere. Either way, money recirculates within the economy, potentially encouraging investment in its new home. Meanwhile, non-selling shareholders have a larger proportionate interest in the company than before.
Paying a larger dividend has a similar effect. Shareholders have more money in their pocket to spend or invest.
Corporations usually pay the wages they need to attract the workers they want. There is no reason to believe that the money not spent on buybacks will go to workers’ salaries.
In the same vein, if the money can be invested at an appropriate rate of return in maintaining or expanding the current business, a corporation should do that rather than buy stock. Or it should invest in new business lines or accretive acquisitions.
But let’s say the money can’t be reinvested profitably? Is President Biden proposing investing in unnecessary production, unwanted services or wasteful acquisitions good for the economy, corporate executives or shareholders?
Consider the case of “Big Oil” Biden’s State of the Union pick. According to Biden, Big Oil was profitable during the energy crisis because “they invested less of the profits to increase domestic production.” They should have “invested in production to keep gas prices up — instead, they used record profits to buy back their own stock, rewarding their CEOs and shareholders.”
Unpack that for a moment. Oil companies, which Biden promised to put out of business during his campaign, must have invested tens if not hundreds of billions of dollars in production that was destined to become obsolete. They should have done this as a public service to lower the price of gas even though those prices are lower than the cost of production. Furthermore, companies have no business rewarding their shareholders if they can subsidize consumers.
Are some companies underinvesting while buying back stock? Absolutely. Are other companies better off paying more workers? Definitely. Should some companies save money for a rainy day? Undoubtedly. Will taxing stock purchases make companies that filter capital distributions smarter about long-term investing? Not a chance.
Jeffrey Scharf welcomes your comments. To contact him, email jeffreyrscharf@gmail.com.
