The Trump administration tax windfall has released billions of dollars into the economy. This windfall has caused more than a few major companies to announce that at least some of this tax money will be used to build much-needed infrastructure, increase employee wages and allow for employee bonuses.
Overall it looks as if the economy and individuals will both benefit. However such may not be the case. Instead of the windfall going to employees and company infrastructure, it looks as if the monies are largely going toward stock buybacks; companies repurchasing their own stock, which boosts the company stock price and the company’s investors reap the benefits, as will CEO’s and others in the C-Suite with their stock-based-compensation.
According to CNBC and Birinyi Associates, companies have announced $88.6 billion in stock buybacks since January 1, more than double the $40.3 billion reported last year in the same period. This year’s year-to-date total is the second-largest amount for that period since 2009 with 61 companies so far announcing their plans to repurchase their own stock.
Ironically, yet it shouldn’t come as a surprise, Wells Fargo is chief among them to the tune of $22.6 billion in buybacks.
A new analysis by William Lazonick and Emre Gomeç of the Academic-Industry Research Network, and Drucker Institute Director Rick Wartzman, who tabulated total business commitments for both buybacks and employee compensation, states it looks like “corporate America has pledged 30 times more to buying back its own shares than to investing in its workforces.”
And according to the analysis, 34 companies on the S&P 500 have announced $157.6 billion in stock buybacks since December. William Lazonick, an economics professor at the University of Massachusetts Lowell and head of the Academic-Industry Research Network who wrote a Harvard Business Review article “Profits Without Prosperity,” has been warning against stock buyouts for some time.
The article discussed the corporate obsession with buybacks which he claimed “fueled the rising income inequality gap at the expense of much-needed corporate investment in research, development, and workers.”
“The issue is what are they not doing when they do stock buybacks,” he told The American Prospect. “What they’re not doing is keeping people employed longer, paying them more, and giving them more benefits. There’s a direct connection between the decline of those norms and the rise of buybacks and the legitimized ideology of ‘Shareholder First.’”
The article points out direct examples of this conundrum, such as Pfizer, Inc. which announced a 6% hike in the pharma giant’s quarterly dividend for 2018 while also authorizing a new $10 billion share repurchase program. Just a few days later, Pfizer announced that it was halting research into drug treatments for Parkinson’s and Alzheimer’s—a move that also meant 300 layoffs!
Mr. Lazonick points out that the buybacks make clear that corporations have become tools for value extraction rather than value creation. He points out that forty years ago big companies paid out about half of their profits to shareholders, investing the rest in research and development, employee training and compensation. However, the Academic-Industry Research Network found that in the last ten years companies have given 94 percent of their profits back to shareholders through dividends or buybacks. This has resulted in record-level stock appreciation.
Buybacks were considered stock manipulation and were generally illegal prior to 1982, when then Securities and Exchange Commission chief John Shad, the first Wall Street executive to take up the post, and his fellow Reagan appointees to the SEC instituted 10b-18, the “safe harbor” rule. That rule allows corporate executives to massively buy back shares and grants them immunity from stock-price manipulation regulations so long as they follow certain restraints. All of a sudden, thanks to the SEC it was legal to manipulate stock!
The American Prospect article says that “proponents of stock buybacks defend them as a tool for efficiently jettisoning unused profits after all other avenues for value creation have been exhausted, or as an effective form of “shark repellant” to fend off hostile takeovers from activist investors.”
Mr. Lazonick, who was the originator of “the theory of innovative enterprise” became one of the first critics of the ideology that companies should be run to maximize shareholder value. He believes it’s time to ban the practice outright and repeal the safe harbor rule.
All this talk of consumers benefiting from the tax windfall may be for naught. As Bloomberg sardonically states, you’re the “CEO of a big, publicly traded company. You want to keep your shareholders happy and justify a big bonus for yourself.” They suggest you can identify opportunities, do the legwork and wait, or you can buy back some shares, give stockholders cash earned or increase dividends.
Image source: Bloomberg
What’s the better thing to do, they ask.
I ask, what’s the right thing to do?
In the 1980s, restrictions on buybacks were loosened and a culture of “shareholder value” was born. Some will argue that almost everyone benefits when stock prices climb. Really? Research shows that the top 10 percent of wealthy U.S. households control 84 percent of the value of all shares.
So who benefits most? And, as I asked in a previous post, so what does all this mean? Most people believe the stock market shows public confidence and public buying, however, the reality is very different. It may all be an illusion, yet another Ponzi scheme. This corporate buyback trend is especially dangerous, as the majority of these purchases since 2009 until today are debt funded!
Since the financial crisis, there’s basically been only one buyer of stocks, and it’s not the average individual who was burned by the crash after the 2008 market plummeted and they lost their investments, but companies who have engaged in the largest debt-funded buyback activity in history. Individual investors are still leery of putting their own money at risk.
Tax windfalls are great. And welcomed. Yet we need to ask, “what’s the outcome?” Are we just putting more money into the pockets of corporate investors or are we striving to better the economy overall of all?
Right now it seems as if the rich are being encouraged to get richer.
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
