Marco Rubio The Latest Politician To Target Stock Buybacks

It’s rare to find bipartisan agreement in Washington, D.C., but GOP Sen. Marco Rubio has joined Democrats Bernie Sanders and Chuck Schumer in calling for legislation to discourage companies from investing so heavily in share buybacks.

These efforts are intended to help boost job creation and wage growth, but some experts believe the political criticism of buybacks is misguided.

Rubio’s Plan

On Tuesday, Rubio unveiled a new plan to raise taxes on capital gains, a proposal that he said will discourage companies from buying back shares of stock and instead encourage capital investment. Rubio is the chairman of the Senate’s Small Business Committee, which rolled out the new plan on Tuesday.

“When [a] corporation uses profits for stock buyback, it's deciding that returning capital to shareholders is better for business than investing in their products or workers,” Rubio tweeted back in December.

Democrats' Alternative

Rubio’s anti-buyback plan comes less than two weeks after Sanders and Schumer wrote an op-ed for the New York Times calling for new rules related to corporate buybacks.

“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,” Sanders and Schumer wrote.

From 2008 to 2017, when the economy was struggling to recover from the worst financial crisis in decades, U.S. companies spent a combined $4 trillion on buybacks, the senators said. 

Missing The Point?

While buybacks have grabbed the attention of both Democrats and Republicans in Washington, Ritholtz Wealth Management portfolio manager Ben Carlson recently wrote that politicians don’t seem to understand exactly how buybacks work.

“You would never hear politicians complain about corporations paying out dividends but, in many ways, share buybacks are simply dividends in disguise,” Carlson said.

Buybacks simply reduce the total shares of stock for a given company, thereby increasing the ownership percentage of the remaining shareholders.

“The research shows that companies that buy back their shares actually outperform companies that have a higher share of investment for the future,” Carlson said.

He said there are much better ways for Congress to attack the U.S. wealth gap than by aiming at buybacks.

“If Congress really wants to help working Americans, lawmakers should encourage more people to invest in the stock market to take advantage of corporations returning money to shareholders, whether that’s in the form of buybacks, dividends or any other number of capital-allocation decisions." 

In the past 10 years, the INVESCO EXCHANG/BUYBACK ACHIEVERS E PKW is up 293.8 percent, whereas the SPDR S&P 500 ETF Trust SPY is up just 226.6 percent in that same time.

Related Links:

Chuck Schumer, Bernie Sanders Urge Limit On Corporate Buybacks

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Photo by Michael Vadon/Wikimedia.