Stock buybacks have become a major source of wealth inequality and have stifled innovation in the U.S., and there should be a ban on them when done as open-market repurchases.
That’s the view of William Lazonick of the University of Massachusetts Lowell, who is also president of the Academic-Industry Research Network.
Lazonick, a longtime critic of corporate share buybacks, has recently published a new book, “Investing in Innovation: Confronting Predatory Value Extraction in the U.S. Corporation,” that makes the case that buybacks are a key plank of “predatory value extraction.”
Predatory value extraction is the practice under which senior executives, Wall Street bankers and hedge-fund managers extract far more value from corporations in which they have acquired shares than they have contributed to the creation of value by those same entities.
That’s not all. They have also made U.S. companies more vulnerable to foreign competitors in some key technologies used in aviation, communications, semiconductors and alternative energy that are critical to U.S. national security and productivity. That’s because companies have chosen to use excess profit for buybacks, rather than investing in infrastructure and innovation, which they instead purchase from foreign, mostly Asian, rivals.
Before buybacks become such a popular tool in the 1980s, companies retained most of their corporate profits to reinvest in their own business or to reward their employees for their contributions to value creation.
That all changed when corporations started to buy back stock in droves as a way to boost the share price by reducing the number of shares outstanding.
Opinion: The blowback against stock buybacks
Between 2012 and 2021, the 474 companies that were included in the S&P 500
SPX
in January 2022 had funneled $5.7 trillion into the stock market in the form of buybacks, equal to 55% of their combined net income. They paid another $4.2 trillion to shareholders as dividends, eating up another 41% of net income.
Dividends, at least, benefit all shareholders, but buybacks benefit share sellers — including senior managers who receive much of their compensation in the form of stock and hedge-fund managers who try to time the buying and selling of shares on the stock market.
Lazonick’s book has plenty of examples of how companies have moved away from “retain and invest” and toward “dominate and distribute” and exactly the impact it has had on the labor force.
The table below shows the 20 biggest buyers of their own stock in the period stretching from 2010 to 2019 and the distributions made during the pandemic years.
From the archives (May 2018): Share-buyback machine remains in overdrive after Republican tax-code overhaul
Eleven companies were in dominate-and-distribute mode heading into the pandemic, namely Apple
AAPL,
-2.62%,
Oracle
ORCL,
-4.18%,
Microsoft
MSFT,
-2.15%,
Cisco
CSCO,
-1.32%,
Walmart
WMT,
-0.77%,
Intel
INTC,
-4.09%,
Home Depot
HD,
-1.07%,
Johnson & Johnson
JNJ,
+0.34%,
Amgen
AMGN,
-0.29%,
Qualcomm
QCOM,
-2.39%
and Gilead
GILD,
-0.92%.
Those companies were using the profit from still-dominant market positions to support their stock prices.
Seven companies — Exxon Mobil
XOM,
-0.75%,
IBM
IBM,
+0.10%,
Procter & Gamble
PG,
-0.46%,
General Electric
GE,
-2.14%,
Merck
MRK,
-1.66%,
McDonald’s
MCD,
+0.17%
and Boeing
BA,
-4.93%
— were in downsize-and-distribute mode, disbursing cash to shareholders as they reduced their workforces.
The last two, Pfizer
PFE,
-1.36%
and Disney
DIS,
-3.91%,
stopped doing buybacks in 2019 to attempt to return to a retain-and-invest posture.
According to Lazonick, consumer companies like Disney, Home Depot, McDonald’s, Procter & Gamble and Walmart employ a large number of low-wage workers who could have been awarded substantial pay raises with the funds instead used to buy back stock. “Gains in the wages and benefits of low-paid workers at the most profitable companies help to lift the incomes of low-paid workers throughout the U.S. economy,” he wrote.
Then there’s the pharmaceutical sector, represented in this list by Amgen, Gilead Sciences, Johnson & Johnson, Merck and Pfizer. Those companies consistently argue that they need high — and unregulated — prices on drugs to support the research and development needed to develop new products.
Yet the 14 drug companies among those 474 components of the S&P 500 cited above have returned 110% of their net income to shareholders and share sellers from 2012 to 2021.
Buybacks alone claimed 55% of net income, far exceeding other sectors.
The $747 billion that the pharmaceutical companies distributed to shareholders and share sellers was 13% greater than the $660 billion that these corporations expended on research and development over that decade, wrote Lazonick.
That undermines their own argument that they need high drug prices to fund innovation, “even as they repeat this contention in opposition to drug-price regulation mandated by the Inflation Reduction Act of 2022,” he wrote.
In the tech sector, Lazonick uses Cisco Systems as an example of a company that has chosen buybacks over investment in the organizational learning required to generate cutting-edge communication-infrastructure products.
Since 2001, Cisco’s management has spent $159.7 billion on buybacks to prop up the stock’s price, equal to 93% of net income. At the same time, the U.S. has fallen behind global competitors in areas like 5G and the Internet of Things.
Apple Inc., meanwhile, initially chose Samsung Electronics
005930,
-1.61%
to make chips for the iPhone, which helped the Korean company gain experience in fabricating the most advanced semiconductors.
By 2011, when Samsung had become a strong competitor in the smartphone business, Apple switched its outsourcing to TSMC
2330,
-3.19%,
which in turn became the world leader in advanced nanometer chip fabrication.
In Lazonick’s view, five things need to happen to end predatory value extraction.
The first is a ban on buybacks executed as open-market repurchases, and the second is a redesigning of executive pay to reward value creation over value extraction.
The third is to add representatives of employees and taxpayers to corporate boards and exclude the predatory value extractors. The fourth is to fix the tax system so that innovation is encouraged. Finally, fifth, companies should support investment in “collective and cumulative careers,” which can give members of the labor force access to productive and remunerative employment opportunities over the decades of their working lives, he wrote.
The stakes are high. An Oxfam report found that in 2022, with inflation eroding the value of their earnings, 32% of the U.S. labor force had hourly wages of $15 or less.
In his 2022 State of the Union address, President Joe Biden proposed a 4% tax on buybacks.
“That’s far from enough,” said Lazonick.
“If the Biden administration insists on taxing rather than banning buybacks, then it should set the surcharge at, say, 40%, with a mandatory toxicity banner on the corporate repurchaser’s website that reads: STOCK BUYBACKS DESTROY THE MIDDLE CLASS.”
Read on:
Receding share buybacks imperil ‘pillar of support’ for U.S. stock market in 2023
Stock buybacks near $800 billion in 2022 after hitting all-time record
Why Biden’s 4% buyback tax could boost stock prices and dividends
SEC votes to arm investors with daily stock buyback data
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