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.
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.
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.
The President of the Association of Flight Attendants-CWA, Sara Nelson, also added her voice to the anti-buybacks chorus.
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.
They may be quiet for now but the pro-buyback crowd is huge and influential. This includes former Goldman Sachs CEO Lloyd Blankfein.
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.
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Last modified: June 12, 2020 10:31 PM UTC