The American economy is in a state of unprecedented uncertainty. Inflation remains high and the threat of recession, spurred on by the Federal Reserve's aggressive interest rate hikes, looms on the horizon. The ongoing debt ceiling fight could wreck the entire global financial system. Foreign conflicts like the war in Ukraine and escalating tensions between China and the West imperil economic security.
While most Americans are concerned with the path the economy is taking, corporate executives remain unperturbed—that is, if their stock buybacks are anything to go by. In January, big public companies spent an incredible $132 billion on stock buybacks, more than triple what they spent in January 2022.
Stock buybacks occur when companies repurchase, or "buy back," their own stock from shareholders, reducing the number of shares on the market, which in turn increases demand for shares and the price of those shares because the value of the company is divided fewer ways.
The current trend of massive buybacks amid economic uncertainty is concerning, but the truth is that stock buybacks are always concerning, in any economic condition. They allow companies to send their profits to shareholders in lieu of investments in their businesses, workers, and communities that would stimulate long-term growth.
Boosting share prices through buybacks might be attractive to investors—Berkshire Hathaway CEO Warren Buffett recently made that clear in his annual letter to shareholders—but they do nothing real to improve the financial health of companies. Buybacks are not a substitute for reinvesting profits in things like new products, new facilities, new training programs, or increased employee pay, all of which substantially improve the underlying value of firms in the long term.
Stock buybacks only serve to further line the pockets of shareholders and short-sighted C-suite executives whose pay consists primarily of stock options and awards. This might be good for companies during good times, but it can be disastrous when a bad year inevitably comes. It can be literally deadly if the company lacks resources to invest in safety, like preventing train crashes, or financially deadly for the company, like airline companies in 2022.
In his State of the Union address, President Joe Biden called out Big Oil companies for their buyback campaigns. In 2022, the world's five biggest oil companies—TotalEnergies, ExxonMobil, Chevron, BP, and Shell—raked in a combined $200 billion in profits. These giants did not spend those funds increasing domestic production to help ease the extraordinary pain Americans experienced at the pumps last summer, but on higher dividends for shareholders and stock buybacks. Between Quarter 3 of 2021 and 2022, ExxonMobil alone spent an astounding $10.6 billion on buybacks—a 10,395 percent increase from the previous year.
Meta is another top runner in the buyback race. The Facebook parent company has posted three consecutive quarters of revenue decline and has committed to cutting costs. But recent developments suggest this only applies to workers, not shareholders like Mark Zuckerberg, Sheryl Sandberg, and Eduardo Saverin. Meta laid off no fewer than 11,000 workers in November but is nonetheless going ahead with a $40 billion stock repurchasing plan.
Perhaps no greater example of the problems that excessive stock buybacks cause can be found than the airline industry. This past December, Southwest Airlines canceled more than 15,000 of its scheduled flights, ruining holiday plans for thousands of stranded customers and crews. The primary reason for the fallout was the failure on the part of executives to invest in a modernized crew-scheduling software system; they instead chose to spend profits over the years on executive compensation packages and stock buybacks.
American corporations didn't always behave like this. In fact, buybacks have only been generally allowed since 1982. But once buybacks came onto the scene and executives shifted their focus exclusively to maximizing shareholder value, real wages began to stagnate and inequality skyrocketed. Before the 1980s, wage growth used to track productivity growth pretty well, but that's no longer the case. Between 1979 and 2020, productivity rose 61.8 percent while the typical worker's pay grew just 17.6 percent (in real terms).
In his State of the Union, President Biden called for a quadrupling of the 1 percent tax on corporate stock buybacks that was introduced with the Inflation Reduction Act. While it sadly has no realistic chance of passing in a Republican-controlled House, the proposal is a positive sign that some of our lawmakers are paying attention. Corporations already pay deplorably little in taxes, so taxing buybacks would force them to start paying their fair share. But the real end goal here is to encourage them to move towards creating a safer and healthier economy that works for everyone in America, not just wealthy investors and C-suite executives, instead of buying back their stock.
Morris Pearl is a former managing director of BlackRock. He is the Chair of the Patriotic Millionaires.
The views expressed in this article are the writer's own.
Uncommon Knowledge
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