Should stock buybacks be eliminated? Depends on who you ask and what you believe is corporate management’s responsibility to the shareholders and the public.
Count Sen. Elizabeth Warren, D-Mass., among those who contend buybacks are bad, a poor use of excess corporate profits that should instead be reinvested in businesses or workers. She argues that buybacks are market manipulations designed to increase the wealth of a company’s top shareholders, which often include corporate executives and managers.
Warren Buffett of Berkshire Hathaway holds a different opinion. In his latest letter to shareholders, he said that if someone says that “all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongue demagogue, characters that are not mutually exclusive.”
Buffett is a tough and very successful businessman with strong principles. He holds himself and his company to high standards of corporate responsibility and even higher standards of protecting and building value for his shareholders. Yes, he owns vast amounts of Berkshire stock but so do America’s pension funds, 401(k)s, endowments, and individuals. So whatever he does to create the long-term value of Berkshire impacts far more shareholders than himself.
But his management decisions regarding stock buybacks are no different than the preponderance of other managers of publicly traded companies. Profits are used to create value for shareholders. Most executives wrestle with how to best invest corporate profits—how much should go to stockholders and how much should go to capital expenditures, hiring new workers, boosting employee pay or training, increasing research and development, expanding product lines, buying other companies or diversifying into other industries.
All these decisions are integral to creating a company’s long-term value, which includes the dividend payout that stockholders expect as a return on their investment. Then, often last on the chain of demands are stock buybacks. Sometimes the decision is easy. If a company stock is undervalued, buying it back is a good use of cash. Value for remaining shareholders is created because they now own more of the company because fewer shares are available.
Do company executives benefit? If they own shares, they benefit the same as other shareholders. Executive shareholders have skin in the game, have their net worth tied up in company stock, and have their financial success tied to other shareholders’ success. That’s an enormous incentive to do what’s in the best interest of the company and its investors.
But Senator Warren and others in Congress don’t see it as a positive. In fact, they have been pressuring the Commerce Department to ensure that no tax dollars from the CHIPS and Science Act of 2022 are used to subsidize corporate stock buybacks directly or indirectly. The act provides about $280 billion for domestic research and manufacturing of semiconductors in the United States.
But their efforts could backfire and scare companies off from taking part in a well-intentioned program designed at enhancing U.S. scientific and technological ingenuity for national security and the overall public good. Firms would be rightfully wary of applying for government grants knowing that their ability to make a profit in the future could be curtailed by government restrictions on the ways they create shareholder value.
And that would be bad for investors in particular and America in general.
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