What are Stock Buybacks, and why is Corporate America at the brink of bankruptcy?
Opinion analysis by Sarah Yehya, Staff Writer
April 27th, 2020
As if the Great Depression itself was not enough to prove to the American government that CEOs must not have their way around greed and avarice, another crisis is now nominated as a runner-up.
Shaping the American economy, companies are expected to gain profits all year round. The debate concerning where these profits will go is mainly limited to three options: better wages for employees, reinvestment in the company, or splitting profits with shareholders.
Corporate America, however, favored a fourth option: stock buy-back.
What are stock buy-backs?
This occurs when a CEO repurchases shares of his own company from the open-market or shareholders. Now that less of the company’s stocks are in the market, those that are left become rare and of higher value – it’s the simple equation of supply and demand. Once these shares are of lower availability, the market increases their price. A higher stock price means that the company’s stock value in the market went up after establishing a successful buy-back. When this happens, the CEO will get a “bonus” irrespective of their salary. The advantages are very rewarding, and have every CEO by his neck. Other benefits of a buy-back would be having more control over the company which in turn will increase the percentage revenue.
Back in the 1920s, when CEOs discovered the lucrative ways of selfish buy-backs, the government put a halt to it. As a result, more money was deposited in company reinvestment and better wages. The graph of productivity vs. wages skyrocketed, which helped create the American middle-class. This aided the economy on a national level, and took role as a catalyst in ending the infamous era known as the Great Depression.
What changed?
When Ronald Reagan ascended to presidency in the 80s and assigned John SR. Shad, a former investment banker, as chairman of SEC (Securities and Exchange Commission) – the rules changed. Shad wanted companies to put less of their profits into reinvestment and wages, he thought more should go to investors, which sparked the return of stock buy-backs.
In 1982, less than 1% of American companies’ profits were spent on buybacks, while in 2018 it reached a whopping 66%. As stated above, more buy-backs will yield more bonuses for the CEO, this was demonstrated as we compared the CEO to employee payment ratio across the years. In 1920, this ratio was 15:1 respectively, then by 2018 it shot up to 220:1.[1]This massive ratio toppling in the favor of the CEOs was the main incentive behind stock buy-backs.
Incidentally, this came about at the expense of the employees. When more money goes to buy-backs, less money is poured into providing employees a better working condition and salary. For example, Harley Davidson, the company, has decided to pull the plug on its plant in Kansas City in favor of redirecting $700 million into buying back stocks. This resulted in 800 newly unemployed individuals[2].But hey, at least the CEO is making money, right?
What was done to compensate?
On November 2nd 2017, the Trump administration catered to these companies with a tax-cut of almost 14%. They hoped that this “tax-break” would stimulate these multi-national companies’ to reinvest in themselves and perhaps develop a better wage for their employees.
Nevertheless, the wheel took the same route.
This time, they used the additional profit to buy back even MORE stocks. The year 2018 recorded $1 trillion in stock buy-backs, taking yearly stats to a new summit. The rich were getting richer, and the poor kept getting poorer. In other words, large American companies held on to their wealth, while the rest of America’s middle class cried in agony.
What is happening today?
Today, the year 2020 has introduced a pandemic that is putting previous economic crises to shame. U.S. airlines are asking for federal aid worth $50 billion, because their revenues plummeted during the corona virus crisis[3]. Looking back at the past decade, they’ve spent $70 billion in stock buy-backs[4]. Other industries like restaurants have asked for a total of $325 billion, while the hotel industry has asked for $150 billion[5]. “It’s an audacious power grab by the same bunch of monstrous grifters who’ve spent the past 20 years reverse mortgaging the American economy to finance Third World dictator lifestyles,” said Moe Tkacik.
Companies have not spent their money wisely and are asking the government for a bailout. At the brink of bankruptcy, Corporate America is in utter desperation. It’s funny how karma works.
[1] https://www.vox.com/2018/8/2/17639762/stock-buybacks-tax-cuts-trump-republicans
[2] https://www.listenmoneymatters.com/stock-buybacks/
[3] https://www.cnbc.com/2020/03/20/stock-buybacks-what-are-they-and-how-do-they-impact-investors.html
[4] https://inthesetimes.com/article/22412/outrageous-corporate-welfare-coronavirus-bailout
[5] https://edition.cnn.com/2020/03/18/business/bailout-requests-coronavirus/index.html