Courtesy of Zero Hedge
In the latest indication of how the Democratic Party's formerly centrist, corporation-friendly establishment is tacking to the left, presumably to capitalize on the enthusiasm generated by "Democratic Socialists" like Bernie Sanders and Alexandria Ocasio-Cortez, Senate Majority Leader Chuck Schumer has joined with socialist standard-bearer Bernie Sanders to author an NYT op-ed decrying the corrosive influence of corporate stock buybacks.
The pair used the editorial to announce a bill they are co-sponsoring that calls for a ban on stock buybacks unless companies can show that they have "invested in workers and communities" first (because when has the government forcing decisions about capital allocation over management ever gone wrong).
If Schumer and Sanders have their druthers, corporations won't be able to buy back their own shares unless they first pay all of their workers a minimum wage of at least $15 an hour, offer seven days of paid sick leave, and offer satisfactory pension and health benefits. Because, in the Democrats' estimation, buying back shares while pensions remain underfunded is simply immoral.
That is why we are planning to introduce bold legislation to address this crisis. Our bill will prohibit a corporation from buying back its own stock unless it invests in workers and communities first, including things like paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.
In other words, our legislation would set minimum requirements for corporate investment in workers and the long-term strength of the company as a precondition for a corporation entering into a share buyback plan. The goal is to curtail the overreliance on buybacks while also incentivizing the productive investment of corporate capital.
Some may argue that if Congress limits stock buybacks, corporations could shift to issuing larger dividends. This is a valid concern — and we should also seriously consider policies to limit the payout of dividends, perhaps through the tax code.
Why wouldn’t it be better for our national economy if, instead of buying back stock, corporations paid all of their workers better wages and provided good benefits? Why should a company whose pension program is underfunded be able to buy back stock before shoring up the pension fund?
Whichever way a corporation chooses to invest in its workers, what’s clear to the vast majority of Americans is that companies should devote resources to workers and communities before buying back stock.
So, in this Congress, the two of us will attempt to get a vote on legislation that demands that corporations commit to addressing the needs of their workers and communities before the interests of their wealthy stockholders.
As regular Zero Hedge readers are probably aware, buybacks have been second perhaps only to QE in driving markets higher over the past decade. According to JPM, since 2009, S&P 500 companies have returned some $5 trillion to shareholders, contributing ~2% to annual EPS growth.
S&P 500 companies set a record last year after buying back roughly $1 trillion of their own shares. And while the number is expected to dip in 2019, at $800 billion, it will remain high relative to recent history.
Buybacks have also contributed to substantially to shareholders' annual yield, often moreso than dividends…
…and sent the S&P 500 divisor back to levels last seen in 1999.
Touching on the eternal capex vs. buyback debate, Sanders and Schumer pointed out that companies apparently now view buybacks as preferable to capex and investing in their workers, a sign that boardrooms have become "obsessed" with maximizing shareholder earnings.
But over the past several decades, corporate boardrooms have become obsessed with maximizing only shareholder earnings to the detriment of workers and the long-term strength of their companies, helping to create the worst level of income inequality in decades.
One way in which this pervasive corporate ethos manifests itself is the explosion of stock buybacks.
So focused on shareholder value, companies, rather than investing in ways to make their businesses more resilient or their workers more productive, have been dedicating ever larger shares of their profits to dividends and corporate share repurchases. When a company purchases its own stock back, it reduces the number of publicly traded shares, boosting the value of the stock to the benefit of shareholders and corporate leadership.
But all other metrics aside, according to Sanders and Schumer, with fewer Americans sharing in the wealth of the stock market's advance (the vast majority of equity ownership is concentrated among the wealthiest 10% of Americans) wages indexed for inflation have declined, leaving workers relatively poorer today than they were in the early 1970s.
First, stock buybacks don’t benefit the vast majority of Americans. That’s because large stockholders tend to be wealthier. Nearly 85 percent of all stocks owned by Americans belong to the wealthiest 10 percent of households. Of course, many corporate executives are compensated through stock-based pay. So when a company buys back its stock, boosting its value, the benefits go overwhelmingly to shareholders and executives, not workers.
Second, when corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest profits more meaningfully in the company in terms of R&D, equipment, higher wages, paid medical leave, retirement benefits and worker retraining.
It’s no coincidence that at the same time that corporate stock buybacks and dividends have reached record highs, the median wages of average workers have remained relatively stagnant. Far too many workers have watched corporate executives cash in on corporate stock buybacks while they get handed a pink slip.
Of course, the bill has no chance of passing the Senate (though, if it gains similar traction in the House, it may have a chance of passing that chamber). And it's fairly unlikely that Trump would sign anything so strongly endorsed by one of his political arch-rivals.
But corporations and executives reliant on buybacks to boost their equity-based compensation will take notice. This could be the beginning of the end of the good times. Because once buybacks are taken out of the equation, and should Democrats win the presidency in 2020 and also sweep Congress, it's difficult to imagine the market replacing that bid (unless wage gains spur the creation of hundreds of millions of active RobinHood accounts).