Accountable by Warren Valdmanis & Warren Valdmanis

Author:Warren Valdmanis & Warren Valdmanis [O’Leary, Michael & Valdmanis, Warren]
Language: eng
Format: epub
ISBN: 9780241460368
Publisher: Penguin Books Ltd
Published: 2020-07-29T00:00:00+00:00

QUESTIONING THE PREMISE OF ADVERSARIAL CAPITALISM

Lost in some of the debate around share buybacks is what happens to the cash that is returned to shareholders. We saw how Boeing’s decision to either issue a dividend or buy back its shares had the same net effect: it would move $13 billion of cash from its balance sheet to the bank accounts of its shareholders. In either case, the cash does not disappear. Shareholders must either reinvest it elsewhere or spend it. (Or they can leave it in their bank accounts, in which case the banks use it to make their own loans or investments.)

In an ideal economy, mature companies with high profits but poor prospects will distribute excess cash to investors, who will then reinvest that cash into young companies with little profit but much promise. We should want those dollars to be used in the most productive way. Far better that than trapping cash in bloated or wasteful companies. Why is it that we hear so many calls to ban share buybacks, but so few to ban dividends? In part, it’s because the logic above is clearer with dividends than with share buybacks. Corporations paying dividends to their shareholders is somewhat analogous to homeowners paying interest to their banks. But share buybacks just feel like financial malfeasance.

So how do we make sense of the sheer size of share buybacks over the last decade? Shouldn’t our corporations be investing that money instead? In 1982, the year share buybacks were reintroduced into the American economy, the United States spent 2.4 percent of GDP on R&D.61 By 2017, this had increased to 2.8 percent. In fact, corporate R&D spending has been increasing at an even faster rate than this suggests, because it’s been offsetting a retreat in government funding. While the federal government spent 1.9 percent of GDP on R&D in 1964, that fell to just 0.6 percent of GDP in 2015, leaving corporations to pick up the slack.62

The story with other investments such as new factories or physical equipment is the same. New private investment has averaged 17.4 percent of GDP since 1950.63 In 2019, it was 17.5 percent of GDP, which was in line with its trailing twenty-year average.

How can it be that corporations are able to distribute so much cash to shareholders in the form of share buybacks while also maintaining investment? Part of the answer is that this is what you’d expect when the economy is so strong. Corporations are not just earning high profits, but central banks including the Federal Reserve are keeping real interest rates at historic lows.64 With cash so plentiful and debt so cheap, there’s just a lot of money sloshing around the system.

The other part of the answer is that the total cash returned to shareholders is not unprecedented. A report by Goldman Sachs found that since 1880, the S&P 500 returned 73 percent of its earnings to shareholders through either dividends or buybacks.65 In 2018, this same ratio was 88 percent of earnings—higher than average, but still lower than a quarter of all years since 1880.

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