I’m less enthusiastic about stock buybacks than the editors of the Wall Street Journal are:
Stock buybacks are the latest bipartisan piñata, whacked by politicians on the left and right who misunderstand capital markets. A refresher course is in order lest Congress stampede and undermine the investment needed for growth.
Repurchasing shares is simply one way a company can return cash to owners if it lacks better ideas for investment. Tax reform increased corporate cash flow by cutting tax rates and letting companies repatriate their cash held overseas by paying a one-time tax rate of 15.5%.
Using Federal Reserve data, Dan Clifton of Strategas Research Partners estimates that companies repatriated $730 billion in 2018. CEOs have deployed that for multiple purposes including new investment, debt reduction, pension contributions, employee bonuses, wage and dividend increases and stock repurchases.
This is a policy success. Mr. Clifton calculates that capital expenditures by S&P 500 companies grew about $75 billion in 2018, the fourth-biggest annual gain since 1991. Average wages are growing by at least 3.4% year over year, the fastest rate in a decade.
Maybe it’s just me but I think that stock buybacks are in a different category than other forms of business capital investment. Other forms are ways of making the company more valuable. Stock buybacks do nothing to make the company more valuable. Their intent is, presumably, to make the stock more valuable per remaining share.
If managers can think of nothing to make their companies more valuable, perhaps those companies need better management. It isn’t said enough but among our gravest problems today is bad corporate management. That takes all sorts of forms including being stupid, greedy, lazy, unimaginative, or just lacking in guts. Are all corporate managers bad? No. But too many are. Reforms in corporate governance are long overdue. Our present laws date to the days before so much stock was held by mutual funds, pension funds, and top management.