COMMENTARY: Why Sens. Schumer and Sanders are Wrong on Stock Buybacks

Traders Magazine Online News, May 20, 2019

Are stock buybacks getting a bum rap on Capitol Hill and subsequently Main Street?

In recent remarks, several prominent politicians have openly questioned corporations’ buying back of stock – saying it serves only as an earnings boost and helps the company and not mom-and-pop investors or Main Street. This buyback money, they argue can be better used to pay workers increased salaries and address other quality of life issues.

Richard Thornburgh, senior advisor of Corsair Capital, in a commentary that first appeared on CNBC, took both U.S. Sens. Chuck Schumer and Bernie Sanders on the issue of stock buybacks. Here is the commentary:

As first published on CNBC

By Richard Thornburgh

In an op-ed in The New York Times on corporate stock buybacks, Senate minority leader Chuck Schumer (D-New York) and Sen. Bernie Sanders (I-Vermont) claim that “stock buybacks don’t benefit the vast majority of Americans” and “nearly 85% of all stocks owned by Americans belong to the wealthiest 10% of Americans.”

The senators reference the $4 trillion of share buybacks completed from 2008 to 2017 by 466 of the S&P 500 companies. It is important to understand that this very large amount of cash did not vaporize, nor did it benefit just a small handful of people. Rather, it was used to positively impact the U.S. economy overall.

An “Economics 101” class teaches us about the multiplier effect — every time there is an increase in spending, it produces an increase in national income and consumption greater than the initial amount spent.

Stock buybacks are an excellent example of this effect at work. As shares are repurchased, the cash is used in a productive manner that benefits many Americans, from both the reinvestment of the proceeds or the spending of the distribution of the proceeds.

Investors can use the cash for a variety of investment opportunities. For example, they can invest in an initial public offering to support a growing business, purchase U.S. Treasurys to finance government spending activities, investing in a corporation or municipality by purchasing its securities or support home ownership in America by purchasing mortgage-backed securities.

So, as to the holders of stock in America, who owns American equities?

According to the Federal Reserve, ownership of American equities breaks down as follows:

• Households and non-profit organizations: 39%
• Funds (mutual funds, closed-end funds, exchange traded funds): 30%
• Foreign investors: 15%
• Public and private retirement funds: 12%
• Insurance companies: 2%
• U.S. banks and broker dealers: 1%
• U.S. governments (federal, state, municipal): 0.5%.

Ultimately all but the not-for-profit shares are beneficially owned by individuals; share ownership cannot be defined by just household ownership.

According to a 2017 Gallop survey, 52% of all Americans own shares through one form of the above classification.

If more than half the population owns shares, it is patently false to presume, as the two senators do that “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, not workers.”

Sens. Schumer and Sanders also forget to note that those who sell into a share buyback do so of their own free will based on their desired asset allocation.

According to the Gallop survey, 62% of adults between the ages of 30 to 64 are shareholders and, therefore, benefit from an increase in the value of the underlying stock. The same holds true for those with retirement savings through a corporate-sponsored pension or savings plan, individual retirement accounts or as part of a municipal, federal or teachers public pension plan.

Additionally, we all benefit from the re-circulation of the $4 trillion of the cash from the share buybacks.

Some of the finest minds in economics and finance have much to offer us on the corporate cost of capital, optimal capital structure and portfolio diversification.

They hold that if a corporation has excess cash, it should look to invest the cash in its business only if the investment can return its cost of capital or greater. If it cannot, the corporation should return the cash to the shareholders (owners) and let the owners determine how to reinvest the cash according to their own risk/return profile.

A $4 trillion boost to shareholders, retirement savers, growing businesses and their workers is a broad benefit that touches our entire economy. Buybacks benefit everyone, not just a select few.

In current times, there is significant focus by institutional investment professionals on how corporations manage their excess capital. If a corporation cannot invest organically in its core business or purchase businesses that offer a return greater than the cost of capital, many investors demand, occasionally through the courts, that the cash be returned to them, as owners, to reinvest as they see fit.

Corporate share buybacks initiated by corporate executives performing their duties on behalf of their owners offer many benefits, and they are widely spread across the U.S. economy.

While Sens. Schumer and Sanders present opinions to the contrary, a $4 trillion boost to shareholders, retirement savers, growing businesses and their workers is a broad benefit that touches our entire economy. Buybacks benefit everyone, not just a select few.

— By Richard E. Thornburgh, senior advisor of Corsair  Capital and former chairman of the Securities Industry Association. Thornburgh has served on a number of Fortune 500 and not-for-profit boards.

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