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The Debate Over Stock Buybacks, Explained | WSJ - YouTube
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(upbeat music)
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In the fourth quarter of 2019,
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companies on the S&P
500 spent an estimated
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$189 billion buying back their own shares
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from the stock market.
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It was the highest in three quarters,
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but not the highest on record.
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In the final quarter of 2018,
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the number was about $223 billion.
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A high point on a decade-long trend.
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In all, since 2010, companies on the S&P
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have poured more than $5.3 trillion
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into repurchasing their own shares.
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Analysts say buybacks
have been a driving force
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in the decade-long bull market.
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But there's some argument about whether
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they're good for the economy.
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Skeptics say the money
used on stock buybacks
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would be better spent elsewhere,
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like building new factories
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or exploring new opportunities altogether.
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Meanwhile, proponents say
buybacks are putting money
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right where it belongs, with shareholders.
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To understand the debate,
you have to understand
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how stock buybacks work.
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The debate around stock
buybacks has to do with
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how companies use their cash.
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They have access to quite
a bit of it right now.
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The tax cuts in 2017,
relatively high earnings
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and low interest rates have all added
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to corporate cash stock piles.
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When a company is flush, it has options
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for what to do with its money.
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It can buy other companies.
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It can spend on research and development.
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It can buy new equipment,
buildings or technologies.
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Or it can return money to shareholders.
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This can take the form of
dividends or stock buybacks.
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In the past ten years,
the top 20 companies
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on the S&P 500 bought back
about $1.3 trillion in shares,
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with Apple leading the way by far.
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In a stock buyback, a company
purchases its own shares
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from shareholders and it
takes them off the market,
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leaving fewer shares outstanding.
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This changes the math on the
remaining shares in a key way.
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It boosts a metric called
Earnings per Share, or EPS.
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The most basic equation for
EPS is the company's net income
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divided by the number
of outstanding shares.
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So when this number
shrinks, the EPS rises.
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So if a company has a
net income of $1,000,
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and has 100 shares
outstanding, its EPS is $10.
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But if it buys back 10 of those shares,
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the EPS rises to $11 and 11 cents.
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Higher per share earnings
makes stocks look good.
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And analysts at the S&P
Dow Jones Indices said that
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a little more than one in
five companies on the S&P 500
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reduced share counts by
at least four percent
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through buybacks in the
most recent quarter,
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boosting earnings per share.
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Stock buybacks can be a good deal
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for remaining shareholders.
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They tend to benefit executives
because rising stock prices
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make their stock options more valuable.
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This is one of the
criticism of stock buybacks.
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The people who decide what
to do with the extra cash
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often stand to benefit.
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Skeptics say that money is better used
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on growing the company.
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Here's a chart that looks at the change
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in business investment since 2013.
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You can see it's gone
negative three times.
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Critics of buybacks say the
practice is partly to blame
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for the lagging business investment.
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In 2019, Democratic senators Chuck Schumer
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and Bernie Sanders argued that
buybacks restrain companies
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from investing in R&D,
equipment, higher wages,
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paid medical leave, retirement
benefits and worker training.
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And Republican senator
Marco Rubio of Florida
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unveiled a proposal that
would change how investors
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are taxed when companies buyback shares.
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Analysts also say that
another worrying sign
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is that buybacks have
coincided with a rise
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in corporate debt levels.
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Some worry that companies
are taking out debt
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to finance the stock buybacks.
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Proponents of buybacks
say there's no real link
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between share repurchases
and tepid capital investment
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and that companies could
be deferring investment
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for other reasons.
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Maybe they're pessimistic
about future demand
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and economic growth and they don't see
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attractive investment
opportunities for the company.
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This camp says that if a company sees
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no profitable use of their money,
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they should return it to shareholders
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who then have the choice to invest it
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on more profitable ventures.
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Some also say the rise in
buybacks is overstated.
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Companies regularly issue
stock as part of compensation
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and the rise in buyback has partly served
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to offset those new shares.
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As this debate continues,
one thing is clear.
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Buybacks are now a big
part of the landscape
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of American finance.
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There's no sign that
that's about the change.
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