The massive increase in company stock buybacks is drawing political scrutiny that likely will intensify with the approach of the 2016 elections, according to Goldman Sachs Group Inc.
Lawmakers are paying closer attention to how companies spend their money, and whether share repurchases are to blame for stagnant wages and a lack of business investment, the New York-based bank said.
Buybacks have increased since the recession ended six years ago, with S&P 500 companies using more than one-third of their cash and about half of their profits to purchase $500 billion of stock in 2014, according to Goldman Sachs. Its equity strategists estimate buybacks will reach $600 billion this year.
The growth of share buybacks to record levels has provoked criticism from analysts and investors who say companies are “hollowing out” their balance sheets by using borrowed money to purchase stock. Companies have had access to cheap debt financing since the Federal Reserve cut rates to record lows
to cope with the worst recession in 80 years.
“The two most obvious avenues for policy change would be securities rules related to the transactions themselves,” said Jan Hatzius in a June 10 report
obtained by Newsmax Finance. “Or tax changes that increase the relative cost to corporations of buying back their own stock instead of paying dividends or making investments in productive capital.”
He cited a request in April by Sen. Tammy Baldwin (D-WI) for the Securities and Exchange Commission to provide analysis on the long-term effect of the original 1982 rule on stock buybacks. Sen. Elizabeth Warren (D-MA), a prominent critic of Wall Street’s role in the financial crisis, recently described buybacks as “stock manipulation” and called on the SEC to consider changing the rules.
The other major issue concerns taxes, because some buybacks are funded by debt with tax-deductible interest payments. Also, corporate managers who are compensated in stock options have greater incentive to buy back shares.
Larry Fink, chief executive officer of BlackRock Inc., the world’s biggest asset manager, is concerned about the issue. He penned a letter
asking the leaders of S&P 500 companies to think about creating long-term value instead of propping up stock values in the short term.
“It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Fink’s March 31 letter said. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”
Goldman cited three reasons share buybacks will gain greater political scrutiny:
- Buybacks continue to grow. This has raised concerns not just among progressive lawmakers but also among some investors and analysts who suggest that the funds might be better put to other uses.
- The White House is expected to nominate two SEC commissioners, one Republican and one Democrat, to replace two departing members. It seems likely that the nominees will be pressed on this issue among many others.
- As the 2016 presidential election campaign gets into full swing later this year, candidates will come under pressure to take positions on a number of financial regulatory issues, and this may be among them.
Goldman said the political scrutiny won’t necessarily translate into legislative action, particularly with Republicans controlling both houses of Congress.
“Corporate share repurchases look likely to draw increased political attention, but rules changes are unlikely in the near term,” Hatzius said in the report co-authored by Goldman economist Alec Phillips. “To the extent that any policy changes are made, the effect on business investment is unclear but seems likely to be small.”
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