Repurchases reallocate under-utilized capital to more efficient purposes.
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
.. The Senators complain that “when corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest.” But the money doesn’t fall into a black hole. An investor who sells stock into a buyback will save or reinvest the proceeds. Walmart gives shareholders cash, and capital markets redirect it to some other useful end.
Banning buybacks won’t create better investment options inside companies. Instead CEOs may spend more on corporate jets or pet projects with marginal economic returns. They could let cash pile up. They could raise dividends, which would also move cash toward better investments. But Messrs. Schumer and Sanders likewise want to “seriously consider policies to limit the payout of dividends, perhaps through the tax code.”