Buybacks may be the one topic that can unite both sides of the political spectrum.
At a White House press conference Thursday, President Donald Trump said he would support measures to keep any bailout funds from being used to buy back their own stock.o And earlier this week, Representative Alexandria Ocasio-Cortez, a self-described democratic socialist, called for a ban on buybacks if any relief money goes to corporations.
There’s good reason for the unanimity: Just like before the 2008 crash, this latest crisis was preceded by a surge in companies repurchasing their own shares.
There’s a case to be made that many companies currently seeking government relief amid a global pandemic are in their current predicament, at least in part, because of how they allocated funds in recent years. The five major U.S. airline spent 96% of their free cash flow on repurchases over the last decade — money that could have been used to build rainy-day funds.
We’ve been here before. In the run-up to the 2008 market crash, buybacks by S&P 500 Index member surged almost fourfold to $650 billion in 2007 from $171 billion in 2000. In 2018, stock buybacks accelerated by 46%, the highest year-over-year growth rate since 2010, and finally returned to pre-Great Financial Crisis highs.
Cash returns to shareholders via buybacks and dividends among S&P 500 Index members totaled $1.25 billion in 2019, accounting for 98% of total cash flow. Of course, as interest rates have hovered near all-time lows, much of that cash returned to investors came in part from debt financing.
Not everyone is as opposed to using excess funds to buyback company stock. Billionaire hedge-fund manager Cliff Asness has gone so far as to label criticism of the practice“Buyback Derangement Syndrome.” With historically low interest rates, cash is better spent by shareholders rather than held by companies, the thinking goes.
While the run-up to this market meltdown hasn’t seen quite the same levels of spending among companies as we did during the prior one, almost 100% of S&P 500 free cash flow has been allocated to dividends and buybacks since 2014.
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