What is a Stock Buyback?

If you've been following corporate investment trends over the past few decades, you’re probably not surprised by what companies are doing with their extra funds from the Republican tax plan. While some have issued one-time bonuses to employees (with few actually giving raises), a larger share of this surplus is being used for stock buybacks and dividend distributions.

Dividends serve as a reward to shareholders, and you can learn more about how to benefit here. On the other hand, stock buybacks occur when companies repurchase their own shares, instead of paying dividends or accumulating cash. This reduces the number of shares available, temporarily boosting the company’s earnings per share and making it appear more profitable, thus driving up its stock price artificially.

Rather than benefiting employees, stock buybacks mainly benefit hedge funds and CEOs who depend on inflated stock prices for their bonuses. As Bloomberg points out, these practices weren't legal until 1982, when the SEC relaxed its rules on stock manipulation.

Despite the apparent benefits, you might question the downside. According to William Lazonick, an economist at the University of Massachusetts-Lowell, buybacks contribute to the stagnation in worker wages since the Recession, even as corporations make record profits and executives grow wealthier. Lazonick writes in the Harvard Business Review:

Let's take a look at 449 companies in the S&P 500 index that were publicly listed between 2003 and 2012. During this time, these companies allocated 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, primarily through open market purchases. An additional 37% of their earnings went toward dividends. This left very little for investment in productive capabilities or to increase employees' wages.

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[T]he very people who should be investing in the productive resources that would benefit our collective prosperity are instead funneling most of their companies' profits toward actions that enrich themselves—with predictable outcomes. Even when adjusted for inflation, compensation for top U.S. executives has doubled or tripled since the early 1990s, when it was already considered excessive. Meanwhile, the overall performance of the U.S. economy has stalled.

A key argument in favor of the tax cuts was that everyone, including workers, would finally see benefits as corporations would use their newfound wealth to invest in their employees. This corporate tax cut was supposed to be a win for the Average Joe.

However, the reality doesn’t quite match up. It turns out the benefits are not as widespread as promised. Here's a revealing visual from Bloomberg:

In February alone, U.S. companies revealed $153.7 billion in stock buybacks, setting a one-month record. But they probably don't want you to know that. Back in December 2017, and continuing into the new year, companies were in full PR mode, making grandiose claims about all the good things the tax cuts would bring. New plants! More money! Jobs for everyone! Here’s a breakdown of Comcast's spin on the tax bill, courtesy of Bloomberg’s Stephen Gandel:

For example, Comcast Corp. announced it would invest $50 billion over the next five years, claiming this would create thousands of jobs, all thanks to the tax cuts. But hold on. That’s about the same amount Comcast has been spending on capital expenditures for years, long before the tax benefits came into play.

According to Gandel, “roughly 60 percent of the tax bill’s gains are going to shareholders, compared to just 15 percent for employees,” which includes salary and benefit increases. This follows a trend that began in the late ‘80s, as Lazonick points out, where the bulk of income for the top 0.1 percent has been from compensation, largely driven by stock-based pay. Meanwhile, workers' wages have seen slow and inconsistent growth.

In this way, stock buybacks contribute to growing inequality. As Joe Nocera from Bloomberg writes, “surely [giving raises] would be a better use of capital than buying back stock. It might even boost productivity. Instead, companies and their shareholders are reaping the rewards created by workers—without sharing the wealth with them.”

Keep in mind that while companies are using the GOP tax cuts to pad their executives’ pockets with inflated profits, workers are left with a one-time $1,000 bonus and no 401(k) match.