Chuck Schumer, Bernie Sanders Urge Limit On Corporate Buybacks

Two Democratic Party leaders penned an op-ed for the New York Times Sunday calling for new rules related to corporate buybacks. Senator and potential 2020 presidential candidate Bernie Sanders and Senate Minority Leader Chuck Schumer collaborated on an article blaming excessive share buybacks as a contributing factor in the widening U.S. wealth gap.

What Are Buybacks?

When a company makes a profit, it has a handful of ways it can use its excess cash. It can choose to carry the cash on its balance sheet and potentially earn interest. It can use that cash to reinvest in the business via research and development, potential mergers and acquisitions or simply remodeling or revamping stores or equipment.

According to Schumer and Sanders, roughly 80 percent of U.S. corporate profits are returned to shareholders via dividends and share buybacks.

A company chooses to buy back its stock in an attempt to create value for its investors. Companies scoop up shares off the public market and retire them, reducing their stock’s total share count. Assuming the market cap of the stock remains the same, lowering the share count theoretically raises the share price. Reducing the share count also raises earnings per share, a common growth metric analysts and investors use to assess the financial health of a company.

Problems With Buybacks

Share buybacks hold two major problems, according to Sanders and Schumer. First, since 10 percent of the wealthiest Americans own 85 percent of all stocks, buybacks mostly directly benefit the wealthy.

The second problem Sanders and Schumer have with buybacks is their opportunity cost, or what companies are choosing not to do when they focus on buybacks.

“When corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest profits more meaningfully in the company in terms of R&D, equipment, higher wages, paid medical leave, retirement benefits and worker retraining,” Sanders and Schumer wrote.

The two senators used Walmart Inc WMT and its $20-billion buyback program as an example. According to Sanders and Schumer, a $20-billion investment would have been more than enough for Walmart to raise its minimum wage to $15 per hour.

Some companies are even laying off workers while carrying on with dividend payments and buybacks. 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, Schumer and Sanders said.

To combat this issue, the senators plan to introduce a bill that would lay out a set of preconditions for companies wishing to launch a buyback program.

“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.

Most Aggressive Buyback Programs

Dozens of companies and stocks could be impacted by the new legislation, but a handful of companies and their investors would be impacted most. The following are the five companies that have bought back the most stock over the past five years, according to Kiplinger:

• Apple, Inc. AAPL: $208.6 billion.
• Microsoft Corporation MSFT: $60.2 billion.
• Wells Fargo & Co WFC: $46.8 billion.
• JPMorgan Chase & Co. JPM: $45.5 billion.
• Oracle Corporation ORCL: $44.1 billion.

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