A major component of stock market gains in recent years is attributable to stock buybacks. Companies have been using their historically huge hoards of cash to purchase their own shares on the market and retire them. This reduces the total number of outstanding shares representing a company’s value, so the value per share increases. It’s a gift to stockholders in lieu of dividends.
Imagine my surprise when I read that this practice was illegal following the 1929 crash. It was considered to be stock manipulation. Who better than Joseph Kennedy Sr., as an accomplished stock manipulator himself (when it was legal), would have been a better choice to lead the new U.S. Securities and Exchange Commission? President Franklin D. Roosevelt decided at the time to appoint a “fox to guard the chicken house” because Kennedy best understood the dark underbelly of the public markets. The regulation against buybacks was rescinded in 1982 by President Ronald Reagan, and along with it came the provision allowing executives carte blanche to invest company cash in purchases of stock without shareholder approval.
This was explored in a new autobiography by Edward Yardeni titled “Predicting the Markets,” which offers an encyclopedia of possible influences on markets — markets including stocks, bonds, interest rates, currencies, commodities — you name it. Yardeni has been a fixture in the pantheon of prognosticators for as long as I can remember. I regularly read his insights as he shuffled through a maze of financial service organizations before starting his own company. His book is a reflection of his intellect.
So the Tax Cuts and Jobs Act was ballyhooed as something to trigger substantial capital expenditures and higher incomes for employees. Instead, over half of those dollars are earmarked for buybacks, and just a small laughable fraction for employee raises. In 2017, total buybacks were $550 billion for the S&P 500 companies and dividends were another $425 billion. All in all, it’s about a trillion dollars paid out to shareholders of just the 500 largest companies. Company executives benefit from buybacks since many receive compensation in the form of stock or stock options. Rising stock prices just mean more income for these executives. It’s easy to see where the sentiments lie and to recall that the nicest people in the world can rationalize what’s in their self interest.
But wait, there’s more. The news just in is that the pace of buybacks is predicted to be 50 percent higher in 2018 than in 2017. Twenty years ago, companies invested in expansion at a rate of four times what they spent on dividends and buybacks.
Since 1 percent of all households own 40 percent of all stocks and 10 percent own 84 percent, a wide swath of our population has been left behind by the combination of 1980s-era deregulation. However, if there is any silver lining in this phenomenon, it is the fact that these statistics do not include the money that the public at large has socked away in retirement accounts. In some respects, we can say that being the future beneficiary of a pension plan means the worker has at least an indirect interest in stock ownership. Direct or indirect, it is still a form of ownership that benefits from rising stock values.
For example, there is currently $27 trillion in the nation’s retirement plans of which about $5 trillion is in 401(k) plans. Then, there’s another $6 trillion in IRA accounts. At least half of all this money is typically invested in stocks, so it’s fair to say that a broad swath of America is, in fact, benefiting from buybacks to the extent that they prop up values. The question remaining, however, is whether or not the practice accomplishes what reform has promised — a direct boost in income to middle- and lower-income Americans and a long-term economic benefit for all of us — a benefit that doesn’t come with record amounts of debt.