buybacks

Senators Bernie Sanders (I-Vermont) and Chuck Schumer (D-New York) want to regulate corporate buybacks of stock, saying they unfairly enrich executives at the expense of workers.

In a recent op-ed for the New York Times, Sens. Sanders and Schumer justified their new bill, arguing that “corporate boardrooms have become obsessed with maximizing only shareholder earnings to the detriment of workers and the long-term strength of their companies, helping to create the worst level of income inequality in decades.”

As CNBC reported Monday, buybacks of company stock have been a staple of Wall Street trading since the recession as a means of providing a stable “floor” for the stock market preventing stocks from bottoming out. Typically, however, buybacks overwhelmingly benefit corporate executives, who are typically compensated with company stock. And the more stock buybacks there are, the more valuable a company’s stock becomes, meaning the net worth of executives who own company stock goes up as well.

However, Sanders and Schumer argue that the money corporations are spending on stock buybacks could instead be invested in providing the workers who generate those profits with better pay and benefits.

It’s no coincidence that at the same time that corporate stock buybacks and dividends have reached record highs, the median wages of average workers have remained relatively stagnant. Far too many workers have watched corporate executives cash in on corporate stock buybacks while they get handed a pink slip.

Recently, Walmart announced plans to spend $20 billion on a share repurchase program while laying off thousands of workers and closing dozens of Sam’s Club stores. Using a fraction of that amount, the company could have raised hourly wages of every single Walmart employee to $15, according to an analysis by the Roosevelt Institute.

Stock buybacks became especially prevalent after the passage of the 2017 Republican tax cuts, which reduced the federal corporate income tax rate from 35 percent to 21 percent. Shortly after the passage of the bill, Bloomberg predicted that the repurchasing of company stock by companies could increase by as much as 70 percent. By the end of 2018, buybacks hit a record high at more than $1.1 trillion, and corporate executives told CNBC the expect the practice to continue this year.

In a December 2018 report, financial magazine Barron’s reported that, of the $1 trillion in announced share repurchases, $460 billion of that money is being spent by just 19 companies. Michael Schoonover, portfolio manager for the Catalyst Buyback Strategy Fund, told the magazine that he expects as much as $700 billion in stock buybacks to be announced this year, and that the record set last year could once again be broken.

Moreover, Schoonover says that in 2018 companies were using much of the cash from tax reform and repatriation to pay bonuses and pay down debt. That’s a positive for buybacks because next year he expects the money to go more to buybacks and $1 trillion in announcements could again be reached.

Additionally, there were a number of very big companies, like Microsoft(MSFT), Procter & Gamble (PG), Home Depot (HD), and Walmart (WMT) that didn’t announce 2018 buybacks, but may in 2019. In particular, he predicts that Apple (AAPL) will again announce another $100 billion potential share repurchases next year, as it did in 2018.

Sanders and Schumer juxtaposed all of the announcements of share repurchases with the news of those same companies laying off workers, like Harley-Davidson and Wells Fargo. The two senators said that their bill would prevent companies from buying back their own stock without first demonstrating that they had made investments in their workforces, like a minimum wage of at least $15/hour, paid sick leave, and “decent” pensions and healthcare benefits.

“At a time of huge income and wealth inequality, Americans should be outraged that these profitable corporations are laying off workers while spending billions of dollars to boost their stock’s value to further enrich the wealthy few,” Sanders and Schumer wrote. “If corporations continue to purchase their own stock at this rate, income disparities will continue to grow, productivity will suffer, the long-term strength of companies will diminish — and the American worker will fall further behind.”

The bill is unlikely to be brought up for a vote by Senate Majority Leader Mitch McConnell (R-Kentucky), who was a staunch defender of the 2017 Republican tax cuts. It’s not clear at this time if a companion bill has been introduced in the U.S. House of Representatives.

 

Tom Cahill is a contributor for Grit Post who covers political and economic news. He lives in Bend, Oregon. Send him an email at tom DOT v DOT cahill AT gmail DOT com.

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