Navigating the Controversy Surrounding Record Stock Buybacks

June 26, 2018

Record-setting stock buybacks following enactment of the Tax Cuts and Jobs Act have riled critics. Companies (and their public relations teams) considering joining the buyback bonanza should anticipate criticism and prepare to articulate the case for buybacks.

The New York Times recently reported that companies in the S&P 500 stock index repurchased $178 billion of shares during the first quarter of 2018, up more than 42 percent from the same period in 2017 and topping the previous record of $172 million during the third quarter of 2007. The increase in buyback activity shows no signs of slowing. According to a June 5 Reuters report, U.S. companies announced $173.6 billion in buybacks during the month of May, the highest monthly total ever.

Critics argue that stock buybacks worsen income inequality and that extra cash should instead be invested in the future or shared with workers. Elizabeth Warren and other Senate Democrats have introduced the Reward Work Act, a bill that would prohibit companies from repurchasing their own shares on the open market. While the bill stands no chance of becoming law given Republican control of Congress and the White House, its very proposal by leading Democrats demonstrates the degree of public animosity against buybacks.

An article in the May 31, 2018, issue of The Economist should be required reading for corporate executives and directors seeking to steel themselves against critics of buybacks. The article, “Six muddles about share buybacks,” addresses the most common criticisms of buybacks and provides strong counterarguments against each of them.

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