Share count reduction since 2010:
- Travelers: 51 percent
- AutoZone: 48 percent
- Kohl’s: 46 percent
- Northrup Grumman: 45 percent
- Lowe’s: 44 percent
- Gap: 42 percent
- IBM: 32 percent
- Apple: 26 percent
Source: S&P Global
What does it all mean and why are so many upset about all these buybacks? The implications are fairly clear: All other metrics being equal, Home Depot’s 35 percent share count reduction means that earnings appear 35 percent better, without any change in “fundamentals” like revenues, costs or taxes.
No wonder corporations are so enamored with them.
This hasn’t stopped several Senators from making proposals to curb buybacks. Sens. Chuck Schumer, D-N.Y., and Bernie Sanders, I-Vt., have proposed that companies meet minimum requirements before being allowed to buy back stock, including a minimum pay level and benefits. Sen. Marco Rubio, R-Fla., wants to reduce the tax advantages of buybacks by raising the rate paid by investors who sell their shares back to the company.
This kind of financial “engineering” has been criticized for years. But there seems to be precious little evidence that reducing the payout ratio — the percent of profits that are returned to investors through dividends and, by extension, through buybacks — would somehow magically improve profits. There also doesn’t seem to be much evidence that corporations would automatically start spending more money on capital investments as an alternative. It’s even doubtful that this would be the best long-term strategy: Throwing money into capital investments may not be an effective return on investment either. Corporations are perfectly capable of making boneheaded investments.
Do buybacks contribute to income inequality? To the extent that reducing shares outstanding improves the earnings picture, you can certainly argue that.
It’s also true that U.S. CEOs make far more money than their counterparts elsewhere, partly due to stock options, and whether they are worth that extra pay is a discussion worth having.
But the root of the problem is that the stock market has become a rich man’s game. A widely cited 2013 study by New York University economist Edward Wolff determined that the top 10 percent of the nation’s households by net worth own 84 percent of the stock market; the top 20 percent own 94 percent.
That means the bottom 80 percent own a measly 6 percent of the stock market.
Far better would be proposals to expand ownership of the stock market by making it easier to save for retirement. Expect more sensible proposals like this from The Wall Street Journal’s Jason Zweig on improving 401(k) investing.
This is the hornet’s nest that Powell stepped into. The Fed — and Congress — should indeed understand the consequences of changing that before stepping in and dictating to corporate America how it should spend its profits.