(upbeat music)
In the fourth quarter of 2019,
companies on the S&P 500 spent an estimated
$189 billion buying back their own shares
from the stock market.
It was the highest in three quarters,
but not the highest on record.
In the final quarter of 2018,
the number was about $223 billion.
A high point on a decade-long trend.
In all, since 2010, companies on the S&P
have poured more than $5.3 trillion
into repurchasing their own shares.
Analysts say buybacks have been a driving force
in the decade-long bull market.
But there's some argument about whether
they're good for the economy.
Skeptics say the money used on stock buybacks
would be better spent elsewhere,
like building new factories
or exploring new opportunities altogether.
Meanwhile, proponents say buybacks are putting money
right where it belongs, with shareholders.
To understand the debate, you have to understand
how stock buybacks work.
The debate around stock buybacks has to do with
how companies use their cash.
They have access to quite a bit of it right now.
The tax cuts in 2017, relatively high earnings
and low interest rates have all added
to corporate cash stock piles.
When a company is flush, it has options
for what to do with its money.
It can buy other companies.
It can spend on research and development.
It can buy new equipment, buildings or technologies.
Or it can return money to shareholders.
This can take the form of dividends or stock buybacks.
In the past ten years, the top 20 companies
on the S&P 500 bought back about $1.3 trillion in shares,
with Apple leading the way by far.
In a stock buyback, a company purchases its own shares
from shareholders and it takes them off the market,
leaving fewer shares outstanding.
This changes the math on the remaining shares in a key way.
It boosts a metric called Earnings per Share, or EPS.
The most basic equation for EPS is the company's net income
divided by the number of outstanding shares.
So when this number shrinks, the EPS rises.
So if a company has a net income of $1,000,
and has 100 shares outstanding, its EPS is $10.
But if it buys back 10 of those shares,
the EPS rises to $11 and 11 cents.
Higher per share earnings makes stocks look good.
And analysts at the S&P Dow Jones Indices said that
a little more than one in five companies on the S&P 500
reduced share counts by at least four percent
through buybacks in the most recent quarter,
boosting earnings per share.
Stock buybacks can be a good deal
for remaining shareholders.
They tend to benefit executives because rising stock prices
make their stock options more valuable.
This is one of the criticism of stock buybacks.
The people who decide what to do with the extra cash
often stand to benefit.
Skeptics say that money is better used
on growing the company.
Here's a chart that looks at the change
in business investment since 2013.
You can see it's gone negative three times.
Critics of buybacks say the practice is partly to blame
for the lagging business investment.
In 2019, Democratic senators Chuck Schumer
and Bernie Sanders argued that buybacks restrain companies
from investing in R&D, equipment, higher wages,
paid medical leave, retirement benefits and worker training.
And Republican senator Marco Rubio of Florida
unveiled a proposal that would change how investors
are taxed when companies buyback shares.
Analysts also say that another worrying sign
is that buybacks have coincided with a rise
in corporate debt levels.
Some worry that companies are taking out debt
to finance the stock buybacks.
Proponents of buybacks say there's no real link
between share repurchases and tepid capital investment
and that companies could be deferring investment
for other reasons.
Maybe they're pessimistic about future demand
and economic growth and they don't see
attractive investment opportunities for the company.
This camp says that if a company sees
no profitable use of their money,
they should return it to shareholders
who then have the choice to invest it
on more profitable ventures.
Some also say the rise in buybacks is overstated.
Companies regularly issue stock as part of compensation
and the rise in buyback has partly served
to offset those new shares.
As this debate continues, one thing is clear.
Buybacks are now a big part of the landscape
of American finance.
There's no sign that that's about the change.