3 Things You Need to Know About Stock Buybacks

Stock buybacks are a well-established corporate strategy that, similar to dividends, provide investors with a return on their investment. In the broader economic cycle, this return allows investors to reallocate capital, which then helps grow the economy and create jobs.

Despite the economic benefits, some policymakers have criticized the practice of stock buybacks. For instance, this past September, Senators Brown (D-OH) and Wyden (D-OR) introduced the Stock Buyback Accountability Act with the intent to limit share repurchases. This bill could be included in the much debated Build Back Better reconciliation package.

With the potential for new legislative developments, now is a good time to take a closer look at stock buybacks: what they are, what they do, what motivates a company to make investment decisions, and who benefits when companies buy back their stock.

Here are three things to know about stock buybacks, according to a recent report from the Chamber’s Center for Capital Market Competitiveness.

 1. Stock buybacks benefit everyday Americans and retirement account holders, not just company executives.

Fifty percent of Americans are invested in the stock market, and four in 10 dollars invested in the stock market are held in retirement funds. Stock buybacks, like dividends, are a common way to distribute earnings to these investors. Shareholders often reinvest gains from buybacks into growing new businesses and creating jobs, which means that proposals to restrict or discourage buybacks would ultimately be detrimental to American families and the U.S. economy. 

2. Companies don’t choose stock buybacks over reinvesting in the company.

Businesses plan to engage in share repurchase plans when they have excess capital. Commitments to workers and R&D are made in the company’s annual planning at the outset of the year, while buybacks are paid from the resulting revenue; companies do not choose buybacks over wage increases or investing in additional research and development. In fact, S&P 500 firms have increased their R&D and capital expenditures as a percentage of revenue over recent years. Additionally, following the passage of the 2017 tax reform package, companies have increased hiring, given employees bonuses and raises, and increased or expanded benefits for employees. 

3. Stock buybacks help the broader economy by delivering cash to companies that need capital. 

S&P 500 firms account for less than 50% of business profits and less than 20% of employment. Capital that flows to shareholders of these companies can be invested in innovative public and private companies of all sizes that are starving for capital. And by the way, small businesses drive a great deal of job growth in this country.

There are a lot of policy issues impacting the U.S. business community that deserve lawmakers’ immediate attention — like the bipartisan infrastructure package, immigration reform, and passing new trade agreements. Raising barriers to distributing earnings would only encourage companies to hold on to excess balances that could otherwise be put to more productive use. Instead, allowing companies and investors to efficiently deploy capital throughout the economy — without the heavy hand of one-size-fits-all government mandates — will lead to the best outcomes for workers, American companies, and the U.S. economy. 

About the authors

Tom Quaadman

Tom Quaadman develops and executes strategic policies to implement a global corporate financial reporting system, address ongoing attempts of minority shareholder abuse of the proxy system, communicate the benefits of efficient American capital markets, and promote an innovation economy and the long-term interests of all investors.

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