Stock buybacks are quickly becoming a divisive issue between investors, financial experts, and businesses leading the charge.
In the most basic explanation, buybacks are the redeeming of shares of stock by the company that issued them. A buyback transpires when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was formerly distributed amongst public and personal investors.
With stock buybacks, aka share repurchases, the business can purchase the stock on the public platform or straight from its investors. In recent decades, share buybacks have actually overtaken dividends as a favored means of returning value to shareholders. While smaller businesses might not be as inclined to repurchase their stock, blue-chip businesses, especially in recent years, have been leading the trend.
Stock buybacks face bipartisan opposition
The steady rise in buybacks occurs in spite of the bipartisan political backlash against the practice. Both Democratic and Republican politicians have voiced concern that U.S. companies aren’t investing enough of their windfall from the 2017 tax cuts into creating new jobs that could help bolster the economy.
Although Corporate America unveiled over $1 trillion of stock buybacks in 2018, the tax law has yet to influence a long-lasting boom in service costs on things like factories, software, and new devices.
Share repurchases are facing harsh criticism from both sides of the aisle in Congress, where critics assert that the practice is detrimental to the general economy.
But the critics might have it wrong.
Corporate behemoths defend buybacks
Two of America’s most successful business leaders are making strong stands in defense of corporate share repurchases, likewise called stock buybacks. Billionaire financier Warren Buffett, CEO of Berkshire Hathaway Inc. (BRK.A), and Jamie Dimon, CEO of JPMorgan Chase & Co. (JPM), the nation’s largest bank are celebrating the practice, stating it’s beneficial to investors and the economy at large.
Unsurprisingly, both companies have spent a lot on buybacks in the last few years.
Throughout the fourth quarter of 2018, Buffett invested over $421 million on share repurchases, including $233.8 million invested in buybacks of Berkshire Hathaway’s A shares between December 13 to December 24.
And over the past five years, JPMorgan Chase has reclaimed nearly 20% of its shares, investing $55 billion to reinvest in itself. JPMorgan’s market value today is about $345 billion.