“I’m outraged that after receiving a huge windfall from the 2017 tax law, many companies chose to spend billions on stock buybacks instead of making long-term investments in their company and their workers,” Senator Tammy Baldwin, a Democrat from Wisconsin, told CNN Business in an email.
Airlines spent $42.5 billion on buybacks
The Big Four Airlines, according to Baldwin’s office, spent $42.5 billion on buybacks between 2014 and 2019. That nearly matches $50 billion the industry is now asking for.
“If they had instead made those long-term investments, they might be better positioned to handle the potential economic crisis that we’re seeing because of the coronavirus,” Baldwin said.
Baldwin, a longtime critic of buybacks, introduced legislation last week that would permanently ban buybacks at bailed-out companies that repurchased $1 billion of stock over the last five years.
Indeed, the economic stimulus legislation being debated by Congress would restrict buybacks from companies that participate in the federal loan program unless they are granted a waiver by the Treasury Secretary. However, that restriction would remain in place only while the loan is outstanding.
President Donald Trump voiced firm support last week for preventing buybacks at bailed-out companies.
“I am fine with restricting buybacks,” Trump told reporters during a briefing on Friday. “In fact, I would demand that there be no stock buybacks. I don’t want them taking hundreds of millions of dollars and buying back their stock, because that does nothing.”
‘We thought they would have known better’
But it was Trump’s signature legislative accomplishment that set off an epic buyback boom on Wall Street.
Buybacks at S&P 500 companies exploded by 55% to a record $806.4 billion in 2018, the first year the tax law took effect, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. S&P 500 companies repurchased another $728.7 billion of stock in 2019.
Defenders of buybacks correctly note that this money doesn’t just disappear. Shareholders can reinvest that money into startups or purchases that boost the economy. And buybacks can be a more productive use of money than companies just sitting on a pile of cash or wasting it on ill-conceived acquisitions.
And buybacks don’t create jobs, at least not directly the way building a factory does.
Trump seemed to acknowledge this problem, saying he doesn’t “like” buybacks because they “artificially” boost stock prices and don’t help workers.
“When we did a big tax cut, and when they took the money and did buybacks, that’s not building a hangar, that’s not buying aircraft, that’s not doing the kind of things that I want them to do,” Trump said on Friday. “We didn’t think we would have had to restrict it because we thought they would have known better. But they didn’t know better, in some cases.”
Buy (back) high, sell low
Some on Wall Street have also been critical of the buybacks at companies that are now seeking bailouts.
To his point, some of these buybacks were done at what now look like incredibly inflated prices. (A bear market will do that to you). That raises further questions about the value of those buybacks, except of course to shareholders who exited at those prices.
Rainy day funds
Of course, it’s terribly difficult for companies to plan for 80% crashes in revenue. Few saw the coronavirus storm coming — until it was far too late.
“This bailout has nothing to do with buying back stock and paying dividends,” said Helane Becker, airline analyst with Cowen. “You can argue they should have rainy day funds, but how big a fund are they supposed to have?”
In the future, airlines and other bailed-out companies won’t have a choice. Buybacks won’t even be an option.