The amount of money large American companies spent on buying back their own stock to prop up their share prices just hit a record high.
Companies in the Standard & Poor’s 500 index spent $104.3 billion on planned stock buybacks in February, which is almost twice what they spent last year and is the most since data tracking began in 1995. Buying back a company’s own stock shares decreases the number of available shares and therefore inflates the value of each that remain, enriching the shareholders who already own them. In February, companies announced an average of more than $5 billion buybacks every day. As of October, they were poised to spend an amount equal to 95 percent of their earnings on buybacks and shareholder dividends for the year.
Stock buybacks don’t do anything, however, to increase actual company productivity or performance. These companies collectively hold $1.75 trillion in cash and marketable securities, according to Bloomberg, an impressive sum. But as the figures on buybacks show, little of it is being reinvested in the companies themselves. A paper from the Roosevelt Institute finds that while between the second half of 2009 and the end of 2013 corporate borrowing increased by $900 billion, just $400 billion was put toward corporate investment, compared to $740 billion spent on shareholder payouts, or in other words stock repurchases and dividends. Between 2003 and 2012, stock buybacks absorbed 54 percent of S&P 500 companies’ earnings and dividends took up another 37 percent, leaving little left over to put toward hiring more workers or paying current ones more.
For example, if Walmart spent the money it spends on stock repurchases on employee wages instead, it could give them all at least $25,000 a year. But Walmart is far from the only company handing money to shareholders instead of workers: wages are growing at the slowest rate since the 1960s and they have been flat or declining for the vast majority of workers since 1979. Corporate profits also bounced back much faster than the unemployment rate in the wake of the recession.
These trends coincide with the rise in stock buybacks. Over the last 30 years, companies switched from investments to a focus on stock prices. The Roosevelt paper notes, “Whereas firms once borrowed to invest and improve their long-term performance, they now borrow to enrich their investors in the short-run.” In the ’60s and ’70s, each additional dollar a company brought in either through higher earnings or borrowing money was associated with a 40-cent increase in investment. But since the 1980s, each dollar meant less than 10 cents got invested, while payouts to shareholders through stock buybacks and dividends have nearly doubled. This trend “may help explain why higher corporate profits in recent business cycles have generally failed to lead to high levels of investment,” the paper’s author writes.
Why put so much money toward shareholders? Companies can sometimes get direct pressure from them to spent money this way. “From an investor’s standpoint, you want the highest return on your dollar, period,” Neil Grossman, chief investment officer of Tkng Capital Partners, told Bloomberg. “If the highest return comes not from growing your business but buying your shares back, that’s fine.”
But it also benefits executives themselves. Executive compensation has become increasingly tied to stock performance, so when buybacks prop up the value of a company’s shares, it also drives up their pay. That’s despite the fact that higher CEO pay isn’t correlated with better company performance or results for shareholders. In fact, the 10 companies that spent the most on stock buybacks between 2003 and 2012 paid their CEOs an average of $168 million each, 58 percent of which was stock based, despite the fact that only three outperformed the S&P 500 benchmark index.
Spending money to boost stock prices instead of investments is perfectly legal and loosely regulated. As economist William Lazonick has pointed out, stock repurchases made on the open market have had “virtually no regulatory limits since 1982.” One way to tamp down on the trend would be to have the SEC more closely regulate them. But it may also require tackling a corporate culture that rewards short-term gain over long-term performance.