WSJ: Worst Coronavirus Idea: A Ban on Share Buybacks

Source behind paywall.

Many politicians lately, including President Trump, have been expressing disdain for corporate stock buybacks during the coronavirus crisis. A couple of investment specialists explore the counterargument in a commentary at The Wall Street Journal today:

“In reality, buybacks create benefits for shareholders large and small, and are a valuable source of cash for many of the people progressives claim to care about, especially retirees…

“Some opponents of buybacks—including Sen. Marco Rubio, hardly a progressive—argue that they waste company cash that ought to be reinvested in plant and equipment. But not every company is in growth mode, and even those that are might have more cash than growth ideas. Within Mr. Buffett’s portfolio of companies, if See’s Candies is showing a huge profit, do we really need to insist that it build more stores? Maybe there are already enough…

“Paying money out to shareholders frees them to reinvest in new companies with big growth ideas. This is the best way to promote growth for the economy as a whole. At a time like this, when so many sacrifices are being made for the sake of the health of the overall community, surely we don’t want to force companies to hoard their capital, any more than we want people to hoard toilet paper.”

I find the counterargument persuasive. It is easy to wax wroth over the immorality of any particular stock buyback, but the circumstances are self-limiting. People who wish to sell their stocks should be free to do so, crisis or not. Similarly, companies that wish to buy back their own stocks should be free to do so, crisis or not. The economics, including self-interest, are no different during a crisis than otherwise.

49 thoughts on “WSJ: Worst Coronavirus Idea: A Ban on Share Buybacks

  1. This is a very silly argument.

    Shareholders do not need the company to buy their shares if they want the cash or to invest in something else. That is what the stock markets are for.

    With that said, companies can do whatever they want with their money but not with the money the government gives them. Duh!

    Liked by 3 people

    1. RE: “companies can do whatever they want with their money but not with the money the government gives them.”

      The point, as I see it, is that that notion doesn’t hold up under scrutiny.

      Yesterday you promoted UBI as a response to the coronavirus crisis. Would you, by analogy, require UBI recipients to only spend their cash on approved purchases?

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      1. No.

        It is not a valid analogy. PEOPLE are the ones who need money. UBI gets it to them directly to spend on what they need or want to keep the economy from collapsing.

        The very silly WSJ argument is based on share buybacks as a way of getting money to the people. THAT is a very inefficient way to achieve that goal and does NOTHING for employees who are facing job losses. More to the point the argument is fatally flawed because buybacks are NOT needed. Stock markets are still functioning so those people who have stocks can cash them in at any time.

        Liked by 2 people

      2. RE: “The very silly WSJ argument is based on share buybacks as a way of getting money to the people.”

        You apparently misunderstand the argument. The authors claim that buybacks are agnostic with respect to getting money to the people. They give an example, which I quoted: “[I]f See’s Candies is showing a huge profit, do we really need to insist that it build more stores?”

        Like

        1. No. We should insist they cover payroll for those who are laid off, furloughed, or otherwise not working. No one is asking companies to grow, as you claim. What is being demanded is that government money be used for the purpose intended.

          I’ve said this more than once today. Why do you keep circling back to things that are NOT being considered?

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        2. @Roberts

          I completely understand the argument. You seem to not understand or accept that it is a flawed argument. We are talking about getting government money to PEOPLE to keep the economy afloat and to keep them from destitution. Passing government money through a corporation that will use it for stock buybacks is a very poor way to accomplish the goal.

          Your example of See’s Candies leaves out a real and common alternative. It is not a choice between buying back shares versus building new stores. They could simply raise their dividends.

          Liked by 2 people

        3. RE: “Passing government money through a corporation that will use it for stock buybacks is a very poor way to accomplish the goal.”

          So you keep repeating, never addressing the assumption that preventing the buybacks would improve the flow of money to the people. The authors point out that that assumption is flawed.

          In the larger scheme of things, controlling the freedom of companies and individuals to do as they will cannot be ultimately beneficial.

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          1. …”controlling the freedom of companies”…

            Companies can do whatever they want with their own money. If they are GIVEN or LOANED money, there CAN be certain caveats attached to it. No one is saying companies can’t buy back their own stocks. They just can’t use the stimulus money to do so.

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          2. RE: “If they are GIVEN or LOANED money, there CAN be certain caveats attached to it.”

            No doubt. But the proposition is that it isn’t wise to attach the no-stock-buyback restriction because in themselves the buybacks cause no harm.

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          3. …”the buybacks cause no harm”.

            That is one opinion. A rong headed one, but an opinon none the less.

            However, and you seem to not be able to grasp this, the stimulus money is meant for companies to maintain payroll for the workers, not increase the take of the c-suite.

            Like

          4. RE: “the stimulus money is meant for companies to maintain payroll for the workers, not increase the take of the c-suite.”

            Doesn’t matter. That’s the point. It’s like giving money to Planned Parenthood. They may use it to pay the rent, but just means they have more money to perform abortions.

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          5. It does matter. But to give free reign to corporations to use government money to increase CEO bonuses or buy back their own stocks to increase their personal bottom lines when they don’t need the stimulus money for ANYTHING, they should not receive any.

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      3. If a company has enough cash to do a stock buyback, like many did with the corporate tax break, then the don’t need help through this crisis.

        Simple enough.

        So up front transparency rather than a 6 month review is pretty crucial unless we want to just give money to corporate America because we are benevolent.

        Liked by 1 person

        1. RE: “If a company has enough cash to do a stock buyback, like many did with the corporate tax break, then the don’t need help through this crisis.”

          That’s not necessarily true. Besides, if your aim is to guaranty continued employment, making the payroll loan without unnecessary restrictions is the fairest, fastest approach.

          Like

          1. At the least, if a company gets $50 million to cover payrolls for absentee workers there needs to verification that is how the money is spent.

            If that frees up other money for stock buybacks, at the very least there should be $50 million going straight to payroll. Ideally, there might be loan of $50 million, with debt forgiveness in 5 years or so after the dust settles. Otherwise we get our money back.

            Liked by 1 person

  2. Would you consider the idea that if a company doesn’t need the money for payroll and other debt requirements, that they do not need any of the government money being floated? Just because something is offered does not mean it needs to be accepted, unless you are going to use it for its intended purposes.

    Also, purchasing more stock drives the price upward, which also benefits current shareholders by increasing the value of already held stock. Long term investors would normally hold on to what they have (possibly buy more if so inclined while the prices are down ) and reap the benefits of the recovery. (remember the “BUY” post from Don awhile back.)

    “Similarly, companies that wish to buy back their own stocks should be free to do so, crisis or not.” But not with government money intended to keep folks on the payroll and to have their jobs ready when this is all over,

    While I respect the WSJ, I find this proposal lacking in anything but empathy for corporations and their major stockholders (many of them in the c-suites of those companies) and not the workers who are in peril because of the virus. – IMO

    And on Warren Buffett: “This is exactly why Warren Buffett’s Berkshire Hathaway has never paid dividends but does buy back its stock. ” My IRA mutual funds do the same thing – Use dividends to buy more shares. I do not see this as the same thing. Earned dividends used to purchase more shares is on thing. Using government money intended for other purposes is NOT the same thing.

    Liked by 2 people

    1. RE: “Would you consider the idea that if a company doesn’t need the money for payroll and other debt requirements, that they do not need any of the government money being floated?”

      Of course. Consideration must also take into account that every company is different, and no company could have foreseen the effects of the epidemic. Plans a company was operating under before coronavirus are no longer valid such that even a company like Apple, with huge cash reserves, might find it advisable to seek federal assistance.

      RE: “But not with government money intended to keep folks on the payroll and to have their jobs ready when this is all over.”

      The point of the WSJ counterargument is that such thinking is shortsighted. While not mentioned specifically, the reason is that money is fungible. This means that giving a company money, say, to pay the light bill is effectively no different from giving it money to pay salaries.

      Like

      1. “This means that giving a company money, say, to pay the light bill is effectively no different from giving it money to pay salaries.”

        The money is being given to manage DEBT, including salaries. Managing debt does not mean buying back their owns stocks and filling the coffers of their individual c-suites.

        Like

        1. RE: “The money is being given to manage DEBT, including salaries. Managing debt does not mean buying back their owns stocks and filling the coffers of their individual c-suites.”

          Debt means loan payments. How are loan payments different from other bills, like light bills?

          Like

          1. RE: “Why do you keep equating stock buybacks with light bills?”

            Light bills and salaries and debt payments are all examples that illustrate the principle of fungibility:

            https://en.wikipedia.org/wiki/Fungibility

            Fungibility is important because it is part of the reason that stock buybacks are not harmful. For example, if you loan money to a company to let it pay an idle workforce, you will free an equivalent amount the the company’s existing cash reserves for other things. Using its own money for a stock buyback would not in any way prevent the payroll loan from paying salaries.

            Like

          2. RE: “If the companies do not require the mosey from the stimulus package to pay salaries, then they don’t need it. PERIOD.”

            Does it not occur to you that a company’s payroll may be larger than the total value of outstanding stock, or the amount it wishes to buy back? You assume too much.

            Like

      1. @Roberts

        Try to keep it real. Trump foolishly touted the efficacy of an unproven drug – chloroquine. That lead directly to this poor MAGAts death. If Trump had not touted it, this fellow would still be alive.

        I find it hard to believe but, in reality, there are millions of people in this country who truly believe that the things that Trump says are true. That is why he needs to keep his mouth shut on subjects he knows nothing about. Don’t you agree?

        Liked by 2 people

          1. I don’t know how unreal he is. You believe every lie Trump tells and swears to it as gospel. Some Trumpers are more gullible than you and this guy had a supply of the chloroquine….for his fish tank cleaning…. and because Trump said it will work (which has not been proven) he took it.

            And the chloroquine MAY be effective in treating the symptoms of the disease. The vaccines being worked on are to prevent people form contracting it. That fact seems to be lost on a lot of folks.

            Liked by 2 people

          2. @Roberts

            Unreal? So you think it is just a coincidence that Trump touts chloroquine and the next day this poor fellow consumes some of it?

            By the way, even the prescribed version of this chemical is very, very dangerous. It does not take much of an overdose to kill the patient.

            Liked by 1 person

          3. RE: “because Trump said it will work (which has not been proven) he took it.”

            Who’s fault is that?

            Like

          4. RE: “So you think it is just a coincidence that Trump touts chloroquine and the next day this poor fellow consumes some of it?”

            Yes.

            Like

          5. @Roberts

            Well, I grant you that it is not impossible that it is merely a coincidence that this fellow would self-treat with an obscure chemical immediately after hearing Trump tout its “game changer” properties. Just very,very unlikely.

            Liked by 1 person

      2. “ The man’s wife, who asked her name not be used to protect her privacy, told NBC News that she took the drug after “I saw it sitting on the back shelf and thought, ‘Hey, isn’t that the stuff they’re talking about on TV?”
        “We were afraid of getting sick,” she told NBC News.”

        Who The man’s wife, who asked her name not be used to protect her privacy, told NBC News that she took the drug after “I saw it sitting on the back shelf and thought, ‘Hey, isn’t that the stuff they’re talking about on TV?'”

        “We were afraid of getting sick,” she told NBC News.”

        Who was talking about that on TV?

        This is the debate we had the other day.

        “ “It’s shown very encouraging — very, very encouraging early results. And we’re going to be able to make that drug available almost immediately. And that’s where the FDA has been so great. They — they’ve gone through the approval process; it’s been approved. And they did it — they took it down from many, many months to immediate. So we’re going to be able to make that drug available by prescription or states,” Trump said.
        He added: “Normally the FDA would take a long time to approve something like that, and it’s — it was approved very, very quickly and it’s now approved, by prescription.”

        “Facts First: Chloroquine has not been approved by the FDA to treat the coronavirus — and nor has any other drug, the FDA made clear in a post-briefing statement that said “there are no FDA-approved therapeutics or drugs to treat, cure or prevent COVID-19.” Because chloroquine has been approved for other purposes, doctors are legally allowed to prescribe it for the unapproved or “off-label” use of treating the coronavirus if they want. But its safety and effectiveness has not been proven with regard to the coronavirus. FDA Commissioner Dr. Stephen Hahn, speaking after Trump at the briefing, said that chloroquine would be tested through a “large, pragmatic clinical trial” with coronavirus patients.”

        https://www.cnn.com/2020/03/19/politics/fact-check-chloroquine-trump-fda/index.html

        I guess that unfortunate couple took Trump at his word. “Almost Immediately” turned out to be true for them.

        Admittedly that couple should have called a doctor first. But they didn’t.

        A president’s words are important. The couple did not study the subtleties and hidden meanings and the re-explanation by others in the actual field of medicine.

        Needless tragedy in my book.

        Liked by 3 people

          1. Then who is responsible? Trump’s words assured those people that it would work. THAT is the kind of thing that happens when you believe the sun rises and sets at Trump’s behest.

            Like

        1. Thanks, actually a very accurate assessment of the Corporate buyback/dividend strategy and the dangers and ramifications thereof.

          Should post it in a separate thread to enlighten some of the brick walls…

          Liked by 1 person

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