While Senate Minority Leader Chuck Schumer (D-NY) and Senator Bernie Sanders (I-VT) have railed against corporations buying back their own stock, share repurchase activity by big companies this year has outpaced last year.
According to Bank of America Merrill Lynch (BAML), corporate stock buybacks “remained strong last week and year-to-date continue to track above last year's records.” They specifically said that activity is pacing 78% above last year’s levels.
While it’s still early in the year, it’s worth pointing out that 2018 was a record with U.S. companies putting more than $1 trillion toward stock buybacks.
According to the BAML report, buybacks by the bank’s corporate clients were primarily in financials and materials sectors last week, with materials remaining at near record levels.
Buybacks have come into focus after Schumer and Sanders introduced legislation this month that aims to prevent company stock buybacks unless the firms put employees first, including a $15 minimum wage, seven days of paid sick time off, and health and pension benefits.
In an op-ed published last week, the pair slammed the $1 trillion worth of stock buybacks in 2018 as a "practice of corporate self-indulgence."
The reason it's problematic, they argue, is that buybacks don't benefit most Americans because a small percentage of people own a majority of the stocks. What's more, many executives receive stock-based compensation and would benefit from share repurchases. They also argue that buybacks limit a company's ability to invest in wages, R&D, training, and other benefits.
Former Goldman Sachs CEO Lloyd Blankfein took to Twitter for the first time since leaving his post at the bank to respond to the senators' criticism.
A company used to be encouraged to return money to shareholders when it couldn't reinvest in itself for a good return. The money doesn't vanish, it gets reinvested in higher growth businesses that boost the economy and jobs. Is that bad? https://t.co/sxfcmve0DA— Lloyd Blankfein (@lloydblankfein) February 5, 2019
To that, Senator Sanders fired back.
Lloyd Blankfein, the former CEO of Goldman Sachs, is correct that the money from stock buybacks “doesn't vanish.” It increases the wealth of billionaires like him. Instead of making the very rich even richer, how about increasing wages for American workers. Is that a bad idea? https://t.co/FpIGQW9IZC— Bernie Sanders (@SenSanders) February 5, 2019
A day later Blankfein responded.
Never thought I'd hear Sen. Sanders criticize me for not paying higher wages at my old firm. https://t.co/xIxyD3qOy7— Lloyd Blankfein (@lloydblankfein) February 6, 2019
Stock buybacks have been controversial for a long time.
In Berkshire Hathaway's 2016 annual letter, Warren Buffett wrote that discussions around buybacks have "often become heated." He made a case that buybacks only make sense for long-term shareholders if "the shares are bought at a price below intrinsic value.”
"As the subject of repurchases has come to a boil, some people have come close to calling them un-American – characterizing them as corporate misdeeds that divert funds needed for productive endeavors. That simply isn’t the case: Both American corporations and private investors are today awash in funds looking to be sensibly deployed. I’m not aware of any enticing project that in recent years has died for lack of capital," Buffett wrote at the time.
Buffett also wrote that there are two instances when buybacks shouldn't take place. First, if the company needs capital for long-term investments in its business and doesn't want to add more debt. And second, if the company needs the money for an acquisition or another investment opportunity that would offer "far greater value than do the undervalued shares of the potential repurchaser."
In a recent client memo, noted investor Howard Marks, the founder of Oaktree Capital Management, took issue with the idea of the government telling companies how they should be run.
"I absolutely am not writing to defend stock buybacks or criticize labor representation on boards. What I oppose is (a) the idea of governments deciding how companies will be run and (b) the appropriation of corporations' economics for parties other than their owners."
Marks continued: "What would be the effects of turning over some of businesses’ capital to workers, or requiring that they be put on corporate boards? Clearly, to do the former would be comparable to saying to shareholders, 'That thing you thought you owned – the company – you don’t really own that.' Stock buybacks are a way of returning capital to companies’ owners. Why should each one be accompanied by giving an equivalent amount to workers? Wouldn’t the next step be to say, 'Whenever a company pays a dividend, it has to distribute an equal amount to its workers'? And wouldn’t that be tantamount to saying, 'As for corporate capital, the workers own half'? Consequences? Ask yourself who would start a corporation in the future if it meant the workers would be entitled to half the gains."
And so the debate goes on.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.