US stock buybacks to remain elevated without policy change in sight

Source:Xinhua Published: 2019/8/11 11:49:09

The amount of money spent by US listed companies in buying back their own shares would continue to stay at a high level amid low interest rates and the low possibility of a new legislation to restrict such practice, according to industry insiders.

Listed companies with S&P 500 Index spent 806.4 billion US dollars in repurchasing their own shares in 2018 in comparison with 519.4 billion dollars in 2017 and 536.4 billion dollars in 2016, according to preliminary data by S&P Dow Jones Indices in later June.


Stock buybacks will remain relatively elevated because companies' earnings are worth more in a low interest rate environment, said Kevin R. Kelly, chief executive officer with investment intelligence provider Benchmark Investments LLC on Friday.

Speaking in an interview with Xinhua, Kelly said when you look at the cost of capital and it makes sense to continue to evaluate all of your prospects, including retiring and doing stock buybacks.

Stock buybacks would remain high as always, Stephen Blitz, chief US economist and managing director with TS Lombard, told Xinhua.

Blitz said as interest rates drop to a lower level and stocks have come down, it's time to buy stocks back.

Stock buybacks with S&P 500 Index member companies would total 940 billion dollars in 2019, according to Goldman Sachs. Meanwhile, Bank of America Merrill Lynch said the spending on share buybacks in S&P Index would surpass 1 trillion dollars in 2019.

Buybacks will continue to increase until a stock-market crash undermines this corporate obsession with sustaining stock-price increases, said William Lazonick, emeritus professor of economics with University of Massachusetts and president of The Academic-Industry Research Network on Friday.

Still, S&P 500 Index member companies posted 205.8 billion dollars of buybacks in the first quarter of 2019, down 7.7 percent from the previous quarter.

Stock buybacks will probably moderate a bit this year after the strong growth in 2018 as a result of lower taxes on overseas cash, which was part of the tax reform law from late 2017, according to David Lefkowitz, executive director and senior equity strategist in Americas with UBS Wealth Management Chief Investment Office.


The hefty buybacks by public companies have drawn criticisms from multiple corners in recent years on the grounds of causing less investment in capital expenditure, research and development as well as uneven distribution of wealth.

Companies are in effect competing to boost stock price rather than competing by investing in productive capabilities to generate innovative products, said Lazonick in an email to Xinhua. "It has become the American economic disease," said Lazonick.

US companies will have a substantial disadvantage in global competition for the sale of goods and services as corporations based in other nations avoid being infected by the afore-mentioned disease, according to Lazonick.

US potential growth is growth in the stock market and it's hard to get accelerated growth from the hovering stock market, according to Blitz.

"I think ultimately it slows the potential rate of growth," said Blitz.

Buybacks help to concentrate income among the richest households while undermining employment stability and higher pay and benefits for workers, said Lazonick.

However, stock buybacks don't result in inequality of income, according to Blitz and Kelly.

"There's a lot of reasons for the wealth gap, and I don't think that the buyback of stock has anything to do with it," Blitz said.

Inequality of income has more to do with the fact that a lot of jobs were created in low-cost countries and technology makes it easier to produce elsewhere in the world and to sell the product here in the United States, according to Blitz.

"Inequality is actually being impacted by a low interest rate environment, where assets are being distorted due to the fact that the government is intervening in manipulating interest rate markets," said Kelly.

US Fed's recent cut of interest rates helps bail out indebted companies for now, but is making them more financially fragile as they continue to borrow to do buybacks and prop up stock prices, warned Lazonick.


A number of US Senators have recognized the problem of "corporate financialization" in general and stock buybacks in particular with multiple acts proposed to restrict stock buybacks.

It is unlikely to see legislative change in the coming quarters with the aim of reining in share repurchase, according to Blitz and Kelly.

"It's more of a talking point for them ...It's exceptionally hard when you're going to be trying to impact the way your biggest donors account for their stocks," said Kelly.

That is gonna be exceptionally hard to get through because it really hits hard at the root of capitalism, Kelly added. Asset managers in the financial community are completely against the idea of restricting share buybacks and the moderates in the Democratic Party would not allow it, according to Kelly.

"They could push for it. But none of this is gonna change until we have a different president or in different leadership in the Senate. All at this point are just noise," said Blitz.

Posted in: ECONOMY

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