Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: It's the holiday season and everyone is getting ready to
Speaker 2: buy stuff. For a lot of people that means getting
Speaker 2: gifts and hitting end of your sales, But for companies
Speaker 2: it means a different sort of shopping spree.
Speaker 3: Microsoft saying, look at all this cash we have, We're
Speaker 3: gonna boost our dividends sixty billion dollars of a buyback.
Speaker 3: This has been a year where sweetness for investors have
Speaker 3: played a really big role in coursely earnings. Right, Companies
Speaker 3: have either been looking to the dividend or to the
Speaker 3: buyback program.
Speaker 2: Companies are buying back shares of their own stocks amid
Speaker 2: a challenging economy for individuals and families across the US.
Speaker 2: Some of the top earning companies in the country are
Speaker 2: flush with cash, and they're using this cash to do
Speaker 2: something that was once illegal but is now one of
Speaker 2: the more popular financial strategies across sectors.
Speaker 4: So companies are taking hundreds or even thousands of shares
Speaker 4: of their stock out of the stock market, and they're
Speaker 4: doing this by buying them back. In the past few years,
Speaker 4: publicly traded companies in the US executed hundreds of billions
Speaker 4: of dollars worth of buybacks. November through December is typically
Speaker 4: the busiest period for them, and twenty twenty four is
Speaker 4: on track to be the biggest year for stock buybacks ever.
Speaker 2: But David, I've been trying to wrap my head around
Speaker 2: why this strategy is so popular. The first time I
Speaker 2: heard about it, it sounded kind of like a weird move.
Speaker 4: I mean, fair enough, because companies sold those shares to
Speaker 4: investors for a reason. They wanted to raise money to
Speaker 4: run their businesses and grow their businesses. So given that,
Speaker 4: it is a little jarring at face to see those
Speaker 4: same companies spending their own money to get those shares
Speaker 4: out of circulation.
Speaker 2: But it all comes down to how this affects the
Speaker 2: value of those shares.
Speaker 1: It does.
Speaker 4: If there are fewer shares in circulation, that means each
Speaker 4: year that's out there is more valuable.
Speaker 5: Means happier shareholders.
Speaker 1: And often happier companies.
Speaker 2: Okay, but there must be someone who's not winning in
Speaker 2: this scenario.
Speaker 1: There is always a loser.
Speaker 4: Stock buybacks have a lot of critics within government and
Speaker 4: among economists, and according to those critics, the losers are
Speaker 4: essentially everybody.
Speaker 2: Else, everybody who's not a shareholder in the company or
Speaker 2: the company itself exactly.
Speaker 5: I'm David Gera and I'm Sarah Holder. This is the
Speaker 5: big take from Bloomberg.
Speaker 2: News today on the show stock buybacks, Why companies do them,
Speaker 2: why shareholders like them, and why regulators want to rain
Speaker 2: them in. Blu Wang is on the cross asset desk
Speaker 2: at Bloomberg News, meaning she covers the ins and outs
Speaker 2: and ups and downs of the stock market every day,
Speaker 2: and she's been writing about stock buybacks for more than
Speaker 2: a decade. I asked her to break down how and
Speaker 2: why they happen. We started with the how a buy
Speaker 2: back is.
Speaker 6: When a public trade the company buying back their own
Speaker 6: shares on the open markets. The buy back shares from
Speaker 6: existing shareholders, just as regular investors typically do through a
Speaker 6: brokerage house.
Speaker 2: So, just like a regular investor, the company reaches out
Speaker 2: to a Wall Street firm like Goldman Socks or Bank
Speaker 2: of America and asks to execute the trade. The company
Speaker 2: can ask to buy all the shares they want on
Speaker 2: a specific day, or they can buy back their shares
Speaker 2: over time on what they call autopilot.
Speaker 6: So, for instance, if a firm wants to buy back
Speaker 6: ten million shares, the ten million share buybacks would be
Speaker 6: conducted on an interval, for instance, monthly basis, so each
Speaker 6: month one million buybacks. That's autopilot loss.
Speaker 2: There are a few reasons why a company might want
Speaker 2: to buy back its own shares. The first can be
Speaker 2: explained by everyone's favorite economic concept, supply and demand.
Speaker 6: Well, theoretically, you know, economics one oh one says when
Speaker 6: demand increases, the prices will go up. So buybacks theoretically
Speaker 6: represent a source of demand that would help prices go up.
Speaker 6: For instance, if a company's value is stable, if it's
Speaker 6: one hundred dollars company, just for the sake of a simplification,
Speaker 6: and if they are one hundred shares outside, then each
Speaker 6: year would be worth one dollar, and if you remove
Speaker 6: half of it then it would become two dollars.
Speaker 2: Basically, when a company buys back its own stock, there
Speaker 2: are fewer shares out in the world. That means everyone's
Speaker 2: remaining shares are worth a little more or a lot more.
Speaker 2: That's obviously good news for those shareholders.
Speaker 6: When the prices go up, they become richer, the holdings
Speaker 6: are becoming more valuable.
Speaker 2: Higher stock prices also look good on company earning reports.
Speaker 6: It helps earnings pressure or revenue pressure. Those financial performance metrics.
Speaker 2: And higher performance metrics for companies can also mean higher
Speaker 2: compensation for executives.
Speaker 6: Some of the executive's bonuses are tied to either shares
Speaker 6: performance or earnings pressure growth. So by artificially making the
Speaker 6: stocks more valuable or their earnings pressure better than whether
Speaker 6: it's looks, their bonuses would benefit from that.
Speaker 5: How is this not market manipulation.
Speaker 6: That's a very good question because for a long time,
Speaker 6: before the nineteen eighties, it was strictly restricted for the
Speaker 6: very notion that it could be seeing as stock madipulation,
Speaker 6: because basically what happened these companies came into the market
Speaker 6: and bid up their own stocks in potentially inflating the
Speaker 6: stock prices. But then came and begins and administration, they
Speaker 6: started deregulating everything, and buy backs restrictions was loosened. Since then,
Speaker 6: you have seen a steady increase in buybacks at this
Speaker 6: rate this year could be a record.
Speaker 5: Wow.
Speaker 2: Why have they accelerated so much over the past few years.
Speaker 6: Well, companies are doing well, they are making record profits,
Speaker 6: and the economy it despite a lot of concerns about
Speaker 6: the potential of recession. It hasn't happened, and companies that
Speaker 6: will wash with cash, so that kind of helped them
Speaker 6: to do more buybacks.
Speaker 2: When Trump's corporate tax cuts went into effect in twenty eighteen,
Speaker 2: they helped fuel stock buybacks too, because when companies have
Speaker 2: more cash, they tend to spend it on buybacks. Goldman
Speaker 2: Sachs estimates that S and P five hundred companies will
Speaker 2: spend more than nine hundred and thirty billion dollars in
Speaker 2: cash on buybacks this year and more than a trillion
Speaker 2: next year. When you see a stock buybacks bree from
Speaker 2: SMP five hundred companies, for example, what does it tell
Speaker 2: you about the stock market at that moment?
Speaker 6: Well, I think I would break it out into two scenarios.
Speaker 6: One is, if it's a steady increase, as we just discussed,
Speaker 6: it usually happens when the economy is doing well, companies
Speaker 6: profitability is healthy, and companies just very confident that they'll
Speaker 6: be able to generate enough cash to maintain the same
Speaker 6: pace or even faster buyback programs. Another scenario is when
Speaker 6: the market is under stress, they have a big sell
Speaker 6: of and stocks tanked, and companies see value in their
Speaker 6: own companies. They would swooping and scoop up their own
Speaker 6: shares on the tube. It's usually a sign a confidence
Speaker 6: that they don't necessarily see this kind of volatility is
Speaker 6: going to hurt a business. That's a good sign, not
Speaker 6: to mention that immediately provides a flaw for their share prices.
Speaker 2: So buybacks they can be good for shareholders, good for
Speaker 2: executives and their stock options, good for the markets, and
Speaker 2: good for companies trying to lock in a better stock price.
Speaker 2: But these buybacks are not cheap, and critics argue that
Speaker 2: all the money companies are spending on their own shares
Speaker 2: could be used on other things instead, innovation within their
Speaker 2: own business, expanding their operations, giving raises to their workers.
Speaker 6: That's the tradeoff a lot of companies need to make.
Speaker 6: Do you help boost the shareholder values via buybacks, or
Speaker 6: do you invest longer term by investing in plants, increasing
Speaker 6: workers wage on benefits that arguably would benefit the host
Speaker 6: society and the economy over the line run.
Speaker 2: It's quite a trade off short term returns for shareholders
Speaker 2: or long term benefits for the economy at large. When
Speaker 2: we come back the push to tax buybacks at a
Speaker 2: higher rate and whether efforts to rain them in will
Speaker 2: make a dent at all. Companies flush with cash are
Speaker 2: using stock buybacks to increase value for shareholders and boost
Speaker 2: their stock prices. Since deregulation made buybacks like these possible,
Speaker 2: they've become an increasingly popular financial tool, but also a
Speaker 2: controversial one. So I asked Bloomberg's lou Wing about more
Speaker 2: of the downsides. Who exactly does a stock buyback hurt?
Speaker 2: Who's losing when companies buy back their shares.
Speaker 6: If companies don't invest for the long run, the whole society,
Speaker 6: the economy suffers because there is no prospect of growth.
Speaker 6: The other argument against the buybacks, it's on this concept
Speaker 6: of wealth gap. When you provide buybacks to the wealthy people,
Speaker 6: they benefit a lot, but it's actually left behind a
Speaker 6: lot of the poor people. Just to put this in,
Speaker 6: the in the bottom half of American house hosts have
Speaker 6: roughly zero point four trillion dollars invested in equities, and
Speaker 6: that's a tiny fraction of the twenty trillion dollars owned
Speaker 6: by just the top one percent. So there is a
Speaker 6: big gap between the rich and pool.
Speaker 2: And so these stock buybacks could help these wealthier shareholders
Speaker 2: who are super invested in the stock market, but it
Speaker 2: might not help the long term business growth which could
Speaker 2: impact more Americans.
Speaker 6: Exactly, exactly.
Speaker 2: So, are there any companies that are famous or infamous
Speaker 2: for using buybacks as a business strategy.
Speaker 6: Well, I wouldn't say as a key business strategy, but
Speaker 6: we do see a lot of technology megacaps. They have
Speaker 6: tons of catching the balance sheets, so they do give
Speaker 6: out a big portion of the money to shareholders. Apple
Speaker 6: earlier this year announced one hundred and ten billion dollar buybacks.
Speaker 5: What was happening that made them do that.
Speaker 6: Well, they just have tons of cash there and they
Speaker 6: don't necessarily see the benefit of investing, you know, or
Speaker 6: buying up another company. So whatever research R and D requirement,
Speaker 6: there is enough to be funded, and they're under pressure
Speaker 6: by shareholders to boost their value to appease those kind
Speaker 6: of investors.
Speaker 2: There are plenty of economic conditions where buybacks wouldn't be
Speaker 2: such a savvy move. Though. What does it say about
Speaker 2: the economy when there's a slowdown in stock buybacks?
Speaker 6: Very good question. So when the company decides to suspend buybacks,
Speaker 6: usually it's when they see some troubles that had either
Speaker 6: a researching is looming or slow down or they have
Speaker 6: some business troubles, they would suspend buybacks in order to
Speaker 6: preserve cash, and that's not a good sign. For instance,
Speaker 6: during the pandemic, many companies affected by the lockdowns, for
Speaker 6: instance airlines, they suspend it buybacks in order to preserve
Speaker 6: their cash. Remember, some of the companies do buybacks on
Speaker 6: the autopilot basis, So sometimes they announced the buybacks for instance,
Speaker 6: you know, as example, they plan to do this over
Speaker 6: the next couple of years, and they say, Okay, we're
Speaker 6: going to suspend buying our own shares, either on the
Speaker 6: quarterly or on their monthly basis.
Speaker 2: So a company could have said in twenty nineteen, we're
Speaker 2: going to be doing buybacks for a couple of years.
Speaker 5: Then the pandemic hits, they might have to cool it. Yes,
Speaker 5: on the Bible exactly.
Speaker 2: Stock buybacks are here to stay, but there's been an
Speaker 2: effort to reign in the frenzy at the federal level.
Speaker 2: President Joe Biden and Senators Elizabeth Warren and Chuck Schumer
Speaker 2: have been vocal critics of buybacks. So has President elect
Speaker 2: Donald Trump, who in twenty eighteen called out companies for
Speaker 2: using some of the cash they saved from his tax
Speaker 2: cuts to fund buybacks.
Speaker 6: So Democrats and Republicans have different opinions on a lot
Speaker 6: of but when it comes to buybacks, they seem to
Speaker 6: be on the same page, which is, buyback is not
Speaker 6: good for the long term prospect of the economy and
Speaker 6: companies should use profits to create new jobs. So in
Speaker 6: twenty twenty two, Congress voted to impose a one percent
Speaker 6: tax on buybacks.
Speaker 5: And what did that tax do well?
Speaker 6: The goal of that tax is to discourage buybacks, but
Speaker 6: that has done little. It's too little to make a
Speaker 6: minifold difference.
Speaker 2: Biden had wanted even higher taxes on buybacks. In his
Speaker 2: twenty twenty three State of the Union address, he called
Speaker 2: for a quadrupling of the rate to four percent. But
Speaker 2: he's leaving office with a one percent tax in place,
Speaker 2: and with the Fed leaning towards cutting interest rates more
Speaker 2: and Trump proposing more corporate tax cuts, experts project another
Speaker 2: banner year for the buyback well.
Speaker 6: Goldman Sax has a very optimistic forecast on buybacks. They're
Speaker 6: projecting fifteen percent of increase from this year, which we
Speaker 6: know is heading for another record.
Speaker 2: Thanks for listening to the Big Take podcast from Bloomberg News.
Speaker 2: I'm Sarah Holder.
Speaker 4: And I'm David Gera. This episode is produced by Julia
Speaker 4: Press and Alex Sekura.
Speaker 1: Who also mixed it. It was fact checked by Adriana Tapia.
Speaker 2: It was edited by Stacy Vanixsmith, Aaron Edwards, and Sid Verma.
Speaker 2: Naomi Shaban is our senior producer. Nicole Bimsterbor is our
Speaker 2: executive producer. Sage Bauman is Bloomberg's head of podcasts.
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Speaker 5: We'll be back tomorrow.