What the Argument Against Stock Buybacks Gets Wrong

Jesse M. Fried

Charles C.Y. Wang

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">In Brief</h4>
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  <h5>The Claim</h5>
  <p>Some experts argue that corporate leaders are starving their firms of investment capital by making excessive payouts to shareholders, thereby undermining innovation, employment opportunity, and economic growth. As evidence, they point to S&amp;P 500 firms’ use of 96% of their net income for repurchases and dividends.</p>
  <h5>The Problem</h5>
  <p>A closer look at the data shows that the amounts going to shareholders at the expense of internal investment are less than claimed. The problem lies in the ratio used—shareholder payouts as a percentage of net income—which fails to take into account offsetting equity issuances as well as actual R&amp;D expenditures.</p>
  <h5>What the Data Shows</h5>
  <p>The percentage of income potentially available for investment that goes to shareholders is not 96% but a much more modest 41%. After paying shareholders, S&amp;P 500 firms are at near-peak levels of investment and have huge stockpiles of cash for exploiting future opportunities.</p>
 </div>
</article-ideainbrief><p>It’s no secret that the American economy is suffering from the twin ills of slow growth and rising income inequality. Many lay the blame at the doors of America’s largest public corporations. The charge: These firms prefer to distribute cash generated from their businesses to shareholders through stock buybacks and dividends rather than invest for the long term, undermining job growth and putting our economic future at risk. Excessive distributions to shareholders, it’s further claimed, also increase inequality: They cause wages to stagnate while enriching shareholders and executives.</p>

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<p>Some experts argue that corporate leaders are starving their firms of investment capital by making excessive payouts to shareholders, thereby undermining innovation, employment opportunity, and economic growth. As evidence, they point to S&#38;P 500 firms&#8217; using 96% of their net income for repurchases and dividends.</p>
<p>A closer look at the data shows that the amounts going to shareholders at the expense of internal investment are less than claimed. The problem lies in the ratio used&#8212;shareholder payouts as a percentage of net income&#8212;which fails to take into account offsetting equity issuances as well as actual R&#38;D expenditures.</p>
<p>The percentage of income potentially available for investment that goes to shareholders is not 96% but a much more modest 41%. After paying shareholders, S&#38;P 500 firms are at near-peak levels of investment and have huge stockpiles of cash for exploiting future opportunities.</p>
<p>There may well be severe corporate governance problems in the S&#38;P 500, but the data suggests that excessive shareholder payouts is not one of them.</p>

Are Buybacks Really Shortchanging Investment?

Some experts argue that corporate leaders are starving their firms of investment capital by making excessive payouts to shareholders, thereby undermining innovation, employment opportunity, and economic growth. As evidence, they point to S&P 500 firms’ using 96% of their net income for repurchases and dividends. A closer look at the data shows that the amounts going to shareholders at the expense of internal investment are less than claimed. The problem lies in the ratio used—shareholder payouts as a percentage of net income—which fails to take into account offsetting equity issuances as well as actual R&D expenditures. The percentage of income potentially available for investment that goes to shareholders is not 96% but a much more modest 41%. After paying shareholders, S&P 500 firms are at near-peak levels of investment and have huge stockpiles of cash for exploiting future opportunities. There may well be severe corporate governance problems in the S&P 500, but the data suggests that excessive shareholder payouts is not one of them.

Are Buybacks Really Shortchanging Investment?

Summary.

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