The Wall Street Journal - USA (2020-12-07)

THE WALL STREET JOURNAL. **** Monday, December 7, 2020 |R7

compensation is increas-

ingly stock-based.

The buyback trend has

become controversial since

a 2014 article by Prof.

Lazonick in the Harvard

Business Review, “Profits

Without Prosperity.” The

S&P 500 companies that

had been publicly listed

from 2003 through 2012, he

found, had spent amounts

equal to 54% of their earn-

ings for buybacks and 37%

for dividends, leaving “very

little for investments in pro-

ductive capabilities or higher

incomes for employees.”

Critics say this formula-

tion exaggerates buybacks’

impact by implying that

funds for research and de-

velopment and capital

spending come solely out of

net income, and ignores

that much of the buyback

spending merely offsets

new issues of stock.

Prof. Lazonick also de-

cried rising CEO pay, “mass

plant closings” and offshor-

ing “millions of unionized

blue-collar jobs.” Maximizing

shareholder value with buy-

backs was “predatory value

extraction,” he said.

If nothing else, the critics

argue that cutting the num-

ber of shares outstanding

can help executives hit

earnings-per-share targets;

49% of big companies link

executive pay to EPS.

The MSCI study found

that as buybacks soared

since 1988, dividends held

relatively steady at around

2% of assets. But capital

spending has fallen from

7.4% in the 1990s to 4% in

the past five years. Spend-

ing for R&D also has

dropped, from 3% to 2.3%.

That supports the notion

that buybacks may detract

from spending for growth.

However, MSCI found buy-

backs haven’t hurt 10-year

capital returns at most com-

panies. Analysts link some

of the drop in capital spend-

ing for physical facilities to

the rise of tech companies,

many of which are “capital

light,” investing in software

development versus hard-

ware or manufacturing.

Where do political

parties stand?

The political push to curtail

buybacks comes mainly

from progressive Democrats.

For instance, last year,

Sen. Chuck Schumer (D.,

N.Y.) joined Vermont pro-

gressive Bernie Sanders in

urging that companies be

required to address their

workers’ needs, including

pay and benefits, before

planning buybacks. A House

subcommittee held a hear-

ing on buyback limits, and

the Senate convened a

panel led by Prof. Lazonick.

Sen. Elizabeth Warren (D.,

Mass.) also backed limits

during her presidential cam-

paign. Another Senate Dem-

ocrat, Sherrod Brown of

Ohio, also introduced a bill in

2019 to require companies

to give bonuses to employ-

ees tied to the value of their

buybacks and dividend in-

creases.

“Buybacks suppress

wages, drive income and

wealth inequality” and allow

“speculators to extract value

from public companies,” Sen.

Tammy Baldwin (D., Wis.)

said last year in re-introduc-

ing her Reward Work Act,

to ban open-market buy-

backs and require employee

board seats. The bill didn’t

move out of committee.

Some Republicans sup-

port milder measures. For

instance, Sen. Marco Rubio

(R., Fla.) wrote in the Atlan-

tic in late 2018 that stocks

sold in corporate buybacks

should be taxed at the

same rate as dividends.

But Republican Trey Hol-

lingsworth of Indiana at the

House hearing called the is-

sue of buybacks versus

worker pay a “fake choice,”

saying that wages are set

by workforce supply and

that demand, and buybacks

are “separate decisions.”

What happens now?

With Democrats in the

White House, “this is an is-

sue that’s going to be on

the table” if they also take

the Senate, says Tom

Quaadman, head of the cen-

ter for capital-markets com-

petitiveness at the U.S.

Chamber of Commerce.

Legislation is less likely if

Republicans hold the Senate

after two Georgia runoffs

next month.

But a Democratic-led Se-

curities and Exchange Com-

mission could enact

tougher disclosure require-

ments by itself. During the

campaign, President-elect

Joe Biden criticized buy-

backs and expressed sup-

port for tighter regulatory

supervision—but not a pro-

gressive Baldwin-style ban

nor Schumer-Sanders over-

hauls.

The Council of Institu-

tional Investors, for example,

has urged disclosure of how

buyback plans affect execu-

tive compensation, and faster

two-day reporting on execu-

tions. A ban might not pass

even if Democrats win a Sen-

ate majority because most

legislation needs 60 votes.

Should investors care?

Buybacks support the market

when it needs it. Notably,

buybacks executed by Gold-

man Sachs clients accounted

for 4.1% of all their stocks’

buy orders in 2017-19, Gold-

man says. So banning or lim-

iting them could hit the size

of 401(k) nest eggs, al-

though estimates vary of

any possible impact.

Mr. Smith, a former financial

reporter for The Wall Street

Journal, is a writer in New

York. He can be reached at

[email protected].

for growth, acquisitions, paying

down debt or paying dividends.

Legalized in 1982 by the

Reagan administration, buy-

backs took off after a 1992

tax bill capped corporate tax

deductions for top executives’

pay at $1 million, but left a

loophole for “performance”

pay tied to stocks. Now, with

stocks and options making up

about two-thirds of C-suite

pay, many buybacks merely

offset new issues to execu-

tives and employees.

They are used most heav-

ily by mature tech companies

likeAppleInc.,Microsoft

Corp. andOracleCorp., while

shunned by a small but fierce

minority led byAmazon.com

Inc. andNetflixInc. A decade

ago,Exxon MobilCorp. did

the most. This year,Berk-

shire HathawayInc. jumped

in big with $15.7 billion to

shrink a $146 billion cash pile.

A study of 610 companies

over three decades by a

stock-analysis unit ofMSCI

Inc. found the most active re-

purchasers were “older, more

established” companies first

listed between 1980 and

2001.. Many companies begin

with “one big idea,” and ride

through their life cycle with-

out another, says Rene Stulz,

a business-school professor at

Ohio State University. The re-

sult is that as companies get

older, they don’t need as

much cash to invest in new

growth initiatives.

MSCI also found that buy-

backs began moving up

steadily from less than 1% of

the companies’ assets before

1994 to an average of 4.1%

for the past five years. The

percentage of companies in

the S&P 500 doing buybacks

has more than doubled to

85% since 1992, according to

research by Goldman Sachs.

In the current low-inter-

est-rate environment, many

companies have taken on

more debt, whose interest

cost can be tax-deductible, to

buy back shares whose divi-

dends may be more costly.

Corporate debt levels at 20-

year highs have financed

much of the buyback binge.

What are the

arguments in favor of

buybacks?

Money managers at mutual-

fund giantsFidelity Invest-

ments and T. Rowe Price

Group say buybacks generally

help drive higher stock valua-

tions. Goldman strategist Da-

vid Kostin says companies

can vary buybacks as earn-

ings fluctuate, while keeping

“steady growth in dividends,”

avoiding a dividend cut that

can hurt the stock.

“Buybacks are really just

dividends with a different

kind of shell around them,”

says Ric Marshall, lead author

of the MSCI study. “They’re

just a tool for moving positive

cash flow to investors. Most

professional investors would

say they’re happy with them.”

Reducing a company’s

share count via buybacks can

increase earnings per share, a

key valuation metric. And in-

vestors who sell shares and

receive buyback proceeds can

redirect the cash to different

companies with better growth

prospects, including venture-

backed startups or IPOs.

What are the

arguments against?

Critics led by William Lazon-

ick, economics professor

emeritus at the University of

Massachusetts Lowell, say

buybacks starve companies

of cash for innovation and

worker pay, and favor execu-

tives aiming to jack up the

stock prices because their

Continued from page R1

CHRIS RATCLIFFE/BLOOMBERG NEWS

YeaorNay:

Buybacks

Many tech

companies love

them. Democrats

hate them. Get

ready for a focus

on buybacks.

HOWDOYOU

MANAGE RISK

THROUGH

BOTH CHAOS

AND CALM?

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JOURNAL REPORT|INVESTING IN FUNDS & ETFS



Amazon.com is

one tech that

shuns buybacks.

NY