Corporate Stock Buybacks Have Abruptly Dropped — Why?
Is this a fluke or a trend?
By Eric Gardner, More Perfect Union
Management at America’s 500 largest companies have suddenly slowed down buying back stock. According to S&P, the country’s biggest corporations reduced buybacks by 36 percent in the second quarter of this year.
You might be asking yourself, “What is a stock buyback?” That’s a fair question. Management can do a lot with the cash that companies generate: reinvest in workers or new equipment, buy other companies, or give the money back to investors. In recent memory, this decision was heavily slanted towards rewarding investors.
When a company wants to give money back to investors (which is a non-sketchy thing for a profit-generating firm to do), one way it can do so is by buying back its stock (definitely sketchy).
We did a full explainer, but the short version is that stock buybacks are a form of financial engineering that provide almost no value to society—that is, outside of artificially manipulating metrics that just so happen to benefit executives and large shareholders.
Companies have abruptly tempered buying back their stock. This quarter's drop follows a 23% decrease in the first quarter. To be clear, major companies are still spending a lot of money on buybacks, but they’re also investing in their businesses. Bloomberg reported that the median company increased spending on things like plants and equipment by 15 percent, while three-quarters announced future spending that exceeded what Wall Street thought they would spend.
This is a far cry from the last few years.
This week, the left-leaning Insitute for Policy Studies think tank published its annual report on executive and worker compensation, Executive Excess. The study identified and analyzed the 100 companies on the S&P 500 with the highest CEO-worker pay gap and found that for every $1 a worker was paid, the typical CEO took home $601. Shareholders were the other big winners. Since 2020, the “Low-Wage 100” members spent $340 billion buying back their stock.
I took a slice of the Low-Wage 100 to see if the ten most unequal major American companies followed Bloomberg’s and S&P’s trends. And well, they did. During the first half of the calendar year, the top 10 of the Low-Wage 100 cumulatively bought back stock at about half the rate they did in 2022. They’ve also slightly increased spending on physical investments.
Dollar General announced it would not have any buybacks during its fiscal year (starting in March). “Our first priority is investing in high-return growth opportunities,” the company’s CFO told investors, “including new store expansion and our strategic initiatives.” This is a stark shift from the last three years, when the Tennessee-based retailer spent just fifty cents on physical infrastructure for every dollar the company spent buying back its stock. The lack of investment in the business culminated with a shareholder resolution requiring the company to study how its practices impact employee wellbeing.
This all raises the question: What’s driving the change?
There are still more questions than answers, but here’s a quick list of plausible considerations.
The Inflation Reduction Act (IRA): Biden’s major policy achievement included significant incentives for companies to invest in clean energy manufacturing. The administration boasts about more than $110 billion in new private investments.
The CHIPS and Science Act (CHIPS): A bipartisan bill to boost investments in the U.S. semiconductor industry led to nearly $166 billion in private sector commitments for new manufacturing facilities.
High-Interest rates: When interest rates were low, some companies would borrow money for the purpose of buying stock.
The new tax on stock buybacks: Buybacks became popular for a bunch of reasons. One was a quirk in the tax law that buybacks were taxed less than dividends even though they essentially perform the same function. The IRA included a provision to tax buybacks at 1 percent, which amounted to $3.5 billion for the first six months of the year. I’m skeptical about this one. Experts didn’t expect the 1 percent tax to have a significant impact on corporate decisions, but it’s fairly unanimous that Biden’s proposed 4 percent tax would.
Public pressure: The last several years of enormous corporate gains and stagnant wages have pushed corporate spending decisions further into the political debate. President Biden featured stock buybacks in his State of the Union address earlier this year. Sens. Elizabeth Warren and Marco Rubio — who rarely agree on anything — have both openly questioned the corporate tactic.
Just a fluke? Two quarters isn’t really much of a trend. You could argue the only reason buybacks are even in decline is because they got so excessive during COVID.
Sarah Anderson, the IPS study's lead author, believes the policy shift has had a substantial impact—but warned that it may not be a permanent solution. “I am hopeful that this overall trend might be a sign that new taxpayer funds going into key sectors like infrastructure, clean energy, and semiconductors are nudging corporations to focus on productive investment instead of short-term gains for executives and shareholders,” she told me.
“But the incentives for CEOs to use this tool to artificially pump up their pay are still there, so we should not assume the problem is solved.”
Watch our stock buybacks explainer here: