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Jamie Dimon defends stock buybacks, calls them 'an essential part of capital allocation'

Julia La Roche

JPMorgan Chase (JPM) CEO Jamie Dimon defended stock buybacks on Thursday, calling them an “essential part of capital allocation.”

“I have already noted that stock buybacks, though sometimes misused, are an important tool that businesses must have to reallocate excess capital,” Dimon wrote in his widely read annual letter. “To reiterate, this should be done only after proper investments for the future have been considered.”

Experts attribute the latest boom in buybacks to President Donald Trump's corporate tax cuts from the Tax Cuts and Jobs Act of 2017, which cleared a way for multinational corporations to repatriate cash held overseas.

“A recent complaint is that companies, partially due to tax reform, have used their excess capital to buy back more stock instead of investing in their business,” Dimon said.

While he notes that this complaint is true, he went on to bust some common myths around share repurchases:

“First, as stock buybacks increased in 2018, so did corporate capital expenditures and research and development (R&D). In fact, contrary to popular belief, capital expenditures as a percentage of GDP are higher today than in the ‘good old days’ of the 1950s and 1960s. Second, companies tend to buy back stock when they don’t see a good use for capital in the next year or two. We believe that as companies adjust to the new higher cash flows, they will begin to reinvest more of that money in the United States. The benefit of tax reform is the long-term (multi-year) cumulative effect of capital retained and reinvested in the United States. And third, the capital that was used to buy back stock did not disappear – it was given to shareholders who then put it to a better and higher use of their own choosing.”

Jamie Dimon, CEO of JPMorgan Chase speaks to the Economic Club of New York in the Manhattan borough of New York City, New York, U.S., January 16, 2019. REUTERS/Carlo Allegri

His comments on buybacks come amid increasing criticism from Washington, D.C.

Earlier this year, Senate Minority Leader Chuck Schumer (D-NY) and Senator Bernie Sanders (I-VT) railed against the practice in a widely circulated op-ed and put forth legislation to curb buybacks, which the pair described as a "practice of corporate self-indulgence."

Senator Marco Rubio (R-FL) also plans to offer legislation to curb share repurchases. Senator Chris Van Hollen (D-MD) argued that company insiders should be prohibited from selling their own shares for a period of time after their firms announce buybacks. More recently, Senator Tammy Baldwin (D-WI) introduced a bill that would ban open-market buybacks.

Despite the unfavorable attention, the data continues to confirm that firms are buying back stock even more aggressively.

Perhaps part of the problem has to do with investors demanding short-term results while claiming to think long-term, Dimon added.

“Here is one concluding comment on long-term investing: Many investors legitimately demand that companies think long term and explain their strategies and policies. Meanwhile, these same investors, who demand long-term thinking from companies, often invest in funds that are paid a lot of money for how a stock performs in one year. I hope these investors appreciate the disconnect and hope they will consider the pressures for short-term performance they may have helped to create,” Dimon wrote.

Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.