Over the last year or two, there has been a Democratic barrage against corporate share buybacks. In 2018, there were $1 trillion buybacks, leading the left to claim that the tax cut was used to pocket the cash and exacerbate income inequality.
As a result, Senator Chuck Schumer (D-NY) and Senator Bernie Sanders (I-VT) want to restrict buybacks, unless corporations introduce a $15 minimum wage and hand out paid time off and expanded health benefits.
“At a time of huge income and wealth inequality, Americans should be outraged that these profitable corporations are laying off workers while spending billions of dollars to boost their stock’s value to further enrich the wealthy few,” they wrote in an op-ed in The New York Times.
But what’s the problem with buybacks?
There are so many uses with buybacks, and, yes, they do include padding a stock’s value, which is beneficial to shareholders. The other reason is because there aren’t any growth opportunities available and the business exhausted all other investment strategies.
What are the other uses? Let’s take a look at a few:
– Send a message to traders that the market has discounted the stock price too much, which means management is confident in the company.
– Allocate capital so that investors can park money in other companies with enormous potential.
– Boost financial ratios to raise the stock value.
– Get taxed at a lower capital gains rate.
– Consolidate ownership.
Robert Wenzel, publisher of Economic Policy Journal, recently remarked on buybacks, citing Fritz Machlup and his book, “The Stock Market, Credit, and Capital Formation.” Machlup lists 115 different permutations of not only buybacks but stock market transactions in general.
In total, there are so many reasons why businesses would partake in share buybacks.
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