“When you are told all this [stock] Whether buybacks are bad for shareholders or the country, or especially beneficial for CEOs, you’re listening to an economic illiterate or silver tongue (inseparable characters). – Famous investor Warren Buffett.
“Corporations need to do the right thing. That’s why I’m proposing that we quadruple the tax on corporate stock and encourage long-term investments.” – President Biden during his State of the Union address.
Will stock buybacks hurt the country by encouraging long-term investment?
A corporation with excess cash has many choices. Can:
• Invest into the business by upgrading existing plant and equipment.
• Expanding the production capacity of the existing business.
• Develop new products and services.
• Make purchases.
• Pay workers more.
• Increasing dividend payout to shareholders.
• Keep money safe for a rainy day.
• Buy back stock.
When a company buys stock, the money is not lost. Selling shareholders receive cash that they can spend elsewhere or reinvest. In any case, the money will circulate again in the economy, perhaps encouraging investment in the new home. Meanwhile, non-selling shareholders have a more proportionate interest in the company than they had before.
Paying high dividends has the same effect. Shareholders have more money in their pockets to spend or reinvest.
Corporations generally pay the wages they need to attract the workers they need. There is no reason to believe that money not spent on buybacks will go into employee compensation.
Similarly, if the money can be invested at a suitable rate of return to sustain or expand the current business, a corporation should do that instead of buying stock. Or it should invest in new business lines or acquisitions.
But suppose the money can’t be reinvested at a profit? President Biden: Is investing in unnecessary products, unwanted services, or wasteful purchases good for the economy, the company’s executives, or shareholders?
Consider the issue of “big oil” that Biden mentioned in the State of the Union. According to Biden, Big Oil made outrageous profits during the energy crisis because they “invested very little of the profits to increase domestic production.” “They should have invested in the product to keep gas prices down — instead, they rewarded their CEOs and shareholders with record profits by buying back their own stock.
Disconnect that for a moment. Oil companies, which Biden promised to put out of business during the campaign, would have had to invest tens, if not hundreds of billions of dollars to make them obsolete. They had to do this as a public service to keep fuel prices down, even if those prices were below the cost of production. Furthermore, the companies had no business rewarding their shareholders when they could subsidize consumers.
Are you investing when you buy shares of some companies? Absolutely. Are some companies better off paying workers more? for sure. Do some companies need to keep rainy day cash on hand? Without a doubt. Does taxing stock purchases make companies that misallocate capital smarter about long-term investments? It’s not a chance.
Jeffrey Scharf welcomes your comments. Email email@example.com to contact him.