(pleasant mallet percussion music)
- [Narrator] On March 27th, President Donald Trump
signed a $2 trillion stimulus plan
aimed at combating the economic consequences
of the coronavirus pandemic,
but the bailout comes with strings attached,
a ban on share buybacks and dividends
for any company receiving a government loan
from the stimulus package.
The ban will last the term of the government assistance
plus one year.
This clause was added after critics argued
that companies like Boeing and airlines
have spent too much money buying back their own shares
from the stock market,
money they could've been saving for a rainy day.
We'll explain, but first,
you have to understand how buybacks work.
In 2017, Trump's tax overhaul
left companies flush with cash.
Over the following two years, companies on the S&P 500
bought back an estimated $1.5 trillion
of their own shares from investors.
- The purpose of the tax cut
was not directly to encourage stock buybacks.
The purpose of the tax cut was to encourage companies
to bring money home and put it to more productive use
in the United States economy.
- [Narrator] In common share buybacks,
the company buys back shares on the open market,
leaving fewer shares outstanding.
This boosts a metric called earnings per share, or EPS.
EPS is calculated by taking the company's net income
and dividing it by the number of outstanding shares.
When the divisor shrinks, the EPS goes up.
Higher earnings per share makes the stock
look more attractive to investors,
which can push up the share price.
- There's a raging debate about, you know,
the benefits of buybacks and how they work,
but I think the people who support them would say,
first of all, that they do benefit shareholders,
and shareholders don't have to be rich people
or hedge fund owners.
They can be pension funds who pay money
to wide ranges of people,
including a lot of organized labor.
They also, according to the advocates,
benefit the economy as a whole.
Critics of buybacks say it's part
of a whole distorted incentive system for corporate America.
They say that a lot of it is related
to the fact that corporate executives
now themselves get paid with stock.
The reason that that has evolved over time
was to try and more closely align the incentives
of CEOS with shareholders,
but it also, in the minds of buyback critics,
has created perverse incentives
where it's also given CEOs an elevated incentive
to worry more about the share price
than about long-term investments
or investing in their workers.
- [Narrator] Buyback activists saw the stimulus package
as an opportunity to implement limitations.
The stimulus sets aside at least $50 billion
for cargo and passenger airlines
and 17 billion for businesses deemed critical
to national security, such as Boeing.
This comes after the coronavirus pandemic
caused a severe dip in ridership,
sending shares into free fall.
Critics point out that over the past 10 years,
the biggest U.S. airlines have spent 96%
of their free cash flow on buying back their own shares.
American Airlines said it's put considerably more money
into capital investments and its team
than buybacks in recent years.
The aircraft manufacturer Boeing is also expected
to receive aid from the stimulus package.
- So the criticism about buybacks and corporate behavior
are aimed at airlines and Boeing
and some sectors looking for federal money
specifically because they are looking for federal money.
The argument is that if you are asking taxpayers for funds
that, first of all, we need to attach some strings
so you're not abusing that money.
A lot of that is sort of a hangover
from the 2008 bailouts when there was a feeling
of banks got taxpayer funds,
then they used it to pay big bonuses to their executives.
- [Narrator] As buybacks have increased in recent years,
they've become a contentious issue in Washington.
- Democrats have long favored restrictions on buybacks
before this latest crisis,
and they see this crisis in a way as an opportunity
to begin to impose new government restrictions on them.
Republicans, in general,
have taken the opposite point of view,
feeling like it's illegitimate for the government
to weigh in imposing new limits
on how companies spend their money.
President Trump, surprisingly, in recent days
has taken essentially the Democratic view
and has echoed their views that buybacks
are not a legitimate way of using corporate money
at a time of crisis.
- Over $500 billion in support
for the hardest-hit industries
with a ban on corporate stock buybacks,
which is something I insisted on.
- [Narrator] The inclusion of an anti-buybacks clause
in the stimulus package
is a big win for those who oppose buybacks,
but even with the stimulus in place,
the U.S. economy is still shaky.
Because of this, most companies are staying focused
on liquidity rather than buybacks.
- This is really a true crisis
where companies are not as much worried
about propping up their own shares
as just preparing for their survival.
In fact, at this moment, a lot of companies
are canceling share repurchase plans,
canceling dividends, trying to keep as much cash on hand
as they can in order to make it through
the next few difficult weeks and months.
(dramatic piano and orchestral music)