Posted in: Market NewsOp-ed
Published:
March 18, 2020 3:20 PM UTC

Coronavirus Will Kill Stock Buybacks, Giving Bernie Sanders a Consolation Win

Thanks to the coronavirus pandemic, a proposal by Bernie Sanders to ban stock buybacks could materialize as his campaign nears its twilight.

  • Airlines will face tough conditions as they seek a bailout amid the coronavirus pandemic.
  • Legislators have tabled stock-buyback bans as one of the conditions.
  • Bernie Sanders has long championed banning share repurchases.

A change in a SEC rule in 1982 saw the amount corporations spend on share repurchases balloon from $2-$3 billion annually in the mid-1980s to an estimated $1 trillion in 2019.

Critics have argued that spending huge amounts on share repurchases harms the long-term strength of listed firms. In times of economic uncertainty, these companies can find themselves exposed with no safety net.

Senators Bernie Sanders and Chuck Schumer wrote early last year:

So focused on shareholder value, companies, rather than investing in ways to make their businesses more resilient or their workers more productive, have been dedicating ever larger shares of their profits to dividends and corporate share repurchases.

After living dangerously, companies are in trouble

As the coronavirus pandemic ravages the economy, companies that dedicated huge amounts to share repurchases are now experiencing rapidly dwindling cash reserves.

Some are now forced to tap credit while others seek a government bailout or both. Airlines, one of the worst affected sectors by the coronavirus pandemic, are eyeing the help of both financial institutions and the federal government.

Yet, these airlines have spent billions on share repurchases over the last decade. The buybacks propped up the stock prices but those capital gains have now evaporated.

American Airlines (NASDAQ:AAL), for instance, spent more than $12 billion on share buybacks beginning in 2014.

The stock reached a high of $59 in early 2018. But following the coronavirus pandemic and the drastic decline in passengers, AAL recently fell to pre-2014 lows of $12. That’s a decline of nearly 80% from the 2018 high.

AAL has fallen by nearly 80% since the 2018 high, which came after the carrier spent over $12 billion on buybacks. | Source: TradingView

Coronavirus reinvigorates anti-buyback politicians

Now the call to ban share repurchases has only grown louder. As airlines appealed to the government for assistance, a move President Donald Trump is receptive to, Democratic congresswoman Alexandria Ocasio-Cortez added to the anti-buybacks chorus.

In a tweet, AOC demanded that any relief package for airlines contain a clause banning buybacks.

Source: Twitter

The President of the Association of Flight Attendants-CWA, Sara Nelson, also added her voice to the anti-buybacks chorus.

Source: Twitter

Democratic socialists and union leaders were not the only ones advocating for a ban on buybacks though. Even billionaire Mark Cuban is for the idea.

Source: Twitter

Is coronavirus about to end the era of stock buybacks?

They may be quiet for now but the pro-buyback crowd is huge and influential. This includes former Goldman Sachs CEO Lloyd Blankfein.

Source: Twitter

Besides shareholders, corporate officers are equally likely to be against banning buybacks. These are the fellows who are likely to be negotiating with Congress.

A 2018 Wall Street Journal op-ed argued thatthe biggest problem with stock buybacks is that they “systematically transfer value from shareholders to executives.”

This is the situation especially when bonuses, stock options and other incentives are tied to per-share earnings. The earnings-per-share ratio increases the more a firm buys back its stock.

In a situation where the very survival of airlines depends of the kindness of politicians, though, corporate officers may have no choice but to accept tough conditions in order to get a bailout. If Congress succeeds in forcing airlines to accept this, the rest of the listed firms could find themselves under a similar predicament.

Sanders’ chances of clinching the Democratic may have evaporated but there’s a consolation prize on the way.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

This article was edited by Sam Bourgi.

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Mark Emem @wetalkmarkets

I cover business and the stock market for CCN. Currently based out of Nairobi, Kenya. Feel free to get in touch with me. Email: wetalkmarkets[at]yahoo.com

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