On Monday, the New York Times published a story on the increasing pace of corporate stock buybacks. It appeared the following day on the front page of the print edition under the title “As Companies Buy Back Shares, A Sell-Off Wears a Bull’s Horns,” but the online version had the better headline: “This Stock Market Rally Has Everything, Except Investors.”
The story points to an interesting contradiction. “The stock market is off to its best start since 1987, but these investors are expected to dump hundreds of billions of dollars of shares this year.” Who are “these investors?” They’re “pension funds and mutual funds, as well as a whole other category of investors — nonprofit groups, endowments, private equity firms and personal trusts.”
What, then, is driving the surge? The answer is a wave of corporate investment, including, nearly a trillion dollars in corporate stock buybacks in 2018, with the current year on pace to match that phenomenal number.
Stock buybacks—or “share repurchases”—are exactly what they sound like: publicly traded companies use their own cash to repurchase stock they’d previously issued and sold on the equity markets. Until 1982, buybacks were broadly illegal and broadly considered to be a pure example of market manipulation, a means to inflate the value of insider portfolios by inflating the value of shares remaining after the repurchase. Companies that wanted to return excess profits to shareholders as cash had to do so through dividend payments.
The principle behind a dividend is straightforward. The purchase of stock makes a person a proportional owner of a company, and it entitles its owner to a proportional share of the profits. And while a stockholder might benefit from an increase in the stock’s value upon its eventual sale—the so-called capital gain—the money value of the stock itself was (again, at least in principle) supposed to be a reflection of the underlying success and performance of a company: its earnings, its assets, etc.
In the era of deregulation, however, as speculative market manipulation has turned capital markets into betting parlors and ponzi schemes, the relationship of stock price to value has basically inverted. Rather than a stock representing in effect a fraction of the underlying value of a company, a company’s value is simply the aggregate price of its shares.
But dividends, being a direct result of the company making money, were and are immediately taxable as income. Among other useful quirks, the increased value of portfolios through buyback-induced increases in share price is this: the taxes are deferrable until those shares are sold. This represents a boon to company insiders whose retained portfolios increase in value, sometimes dramatically.
There is also the question of the sheer volume of all this excess cash. Ever since the market began its post–Great Recession rebound (and at an accelerating clip since the windfall of the Republican tax cuts of late 2017) corporations have been hoarding increasingly absurd piles of money, which has in turn provided the necessary funds for the wave of repurchasing. Well, as long as the markets keep rising, are companies not simply obeying their first duty: maximizing shareholder value?
In 2009, Jack Welch, the former CEO of GE and an ur-figure of the contemporary cult of the messianic corporate executive, called the principle of maximizing shareholder value the “dumbest idea in the world.” He was not the first. In 1970, the Harvard Business School professor Joseph Bower called it “pernicious nonsense.”
Welch was hardly arguing that companies should be run as workers’ collectives. He was making the much milder point that shareholder value is a “result, not a strategy.” Value was the outcome of smart investment, developing new products, and opening new markets, but it was not a plan in and of itself. Meanwhile, businesses had other stakeholders—oh, nothing so wishy-washy as some hazy notion of public benefit or social good, but there were your customers, your products, your partners and suppliers, and heaven, mirabile dictu, your employees! If, after all that, you still had surplus, then, by all means, return it to investors, who will, presumably, reinvest it elsewhere, and so on and so on, in a French-cuffed, monogrammed circle of life.
But shareholder value has always been a bit of a euphemism, increasingly so in the almost 20 years since Welch stepped down from his throne at GE. Value is a slippery word, and whatever its specific meaning in the vocabulary of finance, in popular usage, it implies something broader and more holistic than mere price.
For that reason, it’s worth doing away with the phrase and focusing on what it really means in the second decade of our dumb millennium: share price. As even the casual observer of the economy can see, Welch’s fear—that companies would concentrate on short-term profitability at the expense of long-term planning and investment—was in fact too optimistic. In addition to pursuing stock buybacks, many companies have turned to non-standard accounting metrics, which artificially inflate earnings reports. Corporate “strategy” increasingly focuses on the singular goal of goosing the price of a company’s stock.
In late 2018, after a nine-year-plus bull run, capital markets experienced sharp declines, including a precipitous December sell-off right before Christmas. This may partially have been based on fears of interest rate increases—the Fed has since backed off, but it is also apparent that many investors, including many major institutional investors, are increasingly nervous about what the business press would call market fundamentals. The Times’ piece quotes the interim head of Kentucky’s $17 billion retirement and insurance funds: “We’ve all eaten at the public equity trough very well for 10 years now. And we felt it was just time to reduce that exposure a bit.”
“Reduce that exposure a bit” is fund manager speak for, Holy shit this thing is over-inflated and we expect to hear air whistling out of the balloon any day now.
And if, in fact, institutional and individual investors are fleeing the equity markets, while corporations reward themselves and—most especially—their executives, whose princely compensation packages are largely composed of stocks in the very companies they run, then the whole theoretical edifice justifying these forms of market capitalism begins to look awfully wobbly. Are buybacks really returning money to investors so that they may, with the market’s godlike efficacy, reallocate it to the next great company, or is it all just fuel being shoveled into the engine fire of a huge, unsinkable ship that’s steaming toward an iceberg in the dark.
“The stock market is off to its best start since 1987.” Fantastic. Let’s see what happens around October.