Can the executive branch ban stock buybacks, or does the head of the SEC do that? Could they just decide to ban them again as a form of stock manipulation?
This was meant to be a GQ but I figure it’ll end up here anyway.
Why would anyone ban stock buybacks?
I have no idea if the president could push such a law forward, but it would be a bad idea. There are only a couple of ways to return capital to shareholders, and those are through either a dividend or stock buyback. CFO’s are constantly evaluating the appropriate capital structure (debt and equity mix) that minimizes a company’s cost of capital, while considering short term and long term capital needs. By removing the buyback option, they would only be left with the dividend option, which not only limits the necessary flexibility to create the optimal capital structure, but also forces shareholders into unfavorable tax situations.
Agreed ^^.
Neither the president nor the head of the SEC should wield this kind of unilateral power. Just because I dislike the practice and think it occasionally makes for terrible optics doesn’t mean it can or should be stopped with the stroke of a pen. That’s how Trumpists think.
Are you talking about banning all stock buy backs, or just those done with money that was given to the corporations as part of a government stimulus program? Because those are two different problems.
If the company wants to use their profits to buy back stock, that shouldn’t be a problem, but in situations like we’ve seen in the past few years, where the companies whine about being so broke they need a bailout, only to turn around and pass most of the bailout money back to their investors, that should absolutely be banned.
Keep in mind that when a company buys it own stock its basically saying that it believes that it’s stock is the best ROI on the market, dividends generally are saying that investors can get a better return on their money investing outside of the business and keeping the cash in the business is saying that improving the business is the best return for the shareholders.
In modern scenarios that could mean a company is complaining about being broke and so their share price drops once they have enough cash to stay afloat buying their newly depressed stock may be a great return in the fundamentals of the business are strong and the reason for being broke temporary. Buy the dip is good investment advice for corporations too.
Plus stock buybacks are often used as employee bonuses. It’s a lot easier for a company to say here’s a one time stock grant in good times than other forms of monetary compensation.
The question as stated is a bit confusing, as the SEC is a part of the executive branch – although governed through an independent of board of commissioners.
But according to some quick research, buybacks were all but illegal up until 1982 when an SEC rule change allowed their wider adoption. Presumably, the SEC could undo this through a subsequent rule change although it would certainly be challenged in court.
My impression is that modern stock buybacks are largely more tax-efficient dividends. You’re saying that a buyback signals one claim about the market and a dividend signals the opposite claim, but I don’t think that’s correct at all.
Dividends transfer money from the company to all shareholders. Buybacks transfer money from the company to specific shareholders who choose to generate taxable income.
You’re not wrong but the company can sell shares it bought as a buy back to gain revenue in the future. So they can make money for the company buying their own stock and the reselling it. In the short term there is less stock on the market so it raises prices which can be a gain for shareholders who sell due to that increased share price but generally buy backs are done as a revenue source for the company.
Efficient markets hypothesis says that none of that happens. I’m not saying that it never happens, but stock buybacks should be equivalent to dividends as far as market cap, and there should be no systematic distortions like the ones you’re suggesting.
Yeah, this sounds right to me.
Dividends are taxable immediately (and used to be taxed at ordinary income, but I think they are taxed like capital gains now?), whereas stock buybacks are taxed whenever the investor decides to sell the stock (and that would always be subject to capital gains tax, not ordinary income). So, stock buybacks are a way of issuing a dividend in a tax-efficient way for the investor. Also, stock buybacks can be one-and-done, where once you issue a dividend, it’s usually expected to be repeated quarterly, and always stay steady or go up. Reducing the dividend can signal to the market that the company is in trouble.
So, stock buybacks are tax efficient and can be more flexible. Dividends are the same economically, but are tax inefficient and come with more baggage.
To the OP: I imagine the SEC could prohibit a company from buying its own shares.
How about insider trading issues? The company likely knows far more about its future products and its internal weaknesses than does the general public. Does this give them the ability to buy back stock when they know they have a good product in the pipeline, or sell it because they know they have internal troubles that have yet to be made public?
I don’t agree at all. Stock buybacks were illegal from 1934 until they were legalized again in 1982. I don’t see how a policy change is Trumpian.
As it stands about a trillion dollars a year goes to stock buybacks. Making them illegal again could cause companies to redirect their profits into things like investment in their workers or investments in or their company. How much of that trillion a year could go to higher wages, new jobs, new buildings, better benefits, etc.
American airlines was recently in the news for asking people to work for them for free.
According to a company memo obtained by the Dallas Morning News, American is asking Dallas-based employees to volunteer to work outside of normal hours without additional pay amid an uptick in travel demand while employees based out of its Fort Worth headquarters would work in scheduling, planning and communications and volunteer to take on six-hour shift.
However American Airlines has been spending on average 1-2 billion a year on stock buybacks for the last seven years or so.
In 2019, American Airlines spent $1.1 billion on buybacks , at an average cost of $32.09, according to company disclosures. In fact, from July 2014 to December 2019, American Airlines spent $12.4 billion on stock buybacks at an average weighted cost per share of $39.76, according to disclosures.
How is this a sustainable economic model, companies spend all their profits on stock buybacks, then they ask their employees to work for free or demand government bailouts during bad times. They should be spending their profits on investment and savings during good times rather than spending them all on stock buybacks.
Also around 90% of stocks are owned by the wealthiest 10% of Americans, so the arguments that stock buybacks are a form of employee bonus sounds silly to me. If you want to give your employees a bonus directly, then give them a bonus rather than a few crumbs from stock buybacks designed to benefit the well off. I remember when Trump passed a trillion dollars in tax cuts for the wealthy and fox news was making a big deal of places like home depot offering a $500 bonus to some of their workers (I think it was home depot). Which again, is silly. The workers get crumbs, if you want to give bonuses to your workers, then just give them money directly instead of hoping a few crumbs from a supply side economic model will trickle down.
I guess my question was more can the president ban stock buybacks, or does the head of the SEC do that? The DOJ is part of the executive branch but generally the DOJ operates independently of the president. I didn’t know how much power the president would have to pressure the SEC to ban buybacks.
Again, 90% of stocks are owned by 10% of Americans, why am I supposed to feel bad that people with high net worth will pay more taxes? You act like thats a bad thing.
The potential policy change isn’t what I called Trumpian. The idea that a president can just, all by himself, make something illegal is Trumpian.
I agree with your opinion of stock buybacks, but if you want them banned it should be via actual legislation, not just the president snapping his fingers.
Stock buybacks are just a more efficient dividend. I find it extremely unlikely that they would invest in workers or in the company – if they had to do that, they wouldn’t have done the buybacks. Eliminating buybacks would just lead to more companies paying dividends, in my opinion.
The SEC is much more independent than the DOJ. The Attorney General is appointed by the President (subject to Senate confirmation) but can be removed by him at any time. SEC Commissioners are appointed by the President (again subject to Senate confirmation) to staggered, five-year terms and cannot be fired. There’s also a requirement that no more than three of the five commissioners can be of the same political party. So the President could strongly urge the SEC to ban buybacks, but he does not have the power to force them to. Over time, he could potentially stack the board with appointees who agree with his position.
It’s also important that the change that allowed buybacks was done through rulemaking. This is a codified process subject to specific legal steps and requirements such as allowing public comment. To undo the rule change, the SEC would need to adopt another rule. This new rule would certainly be the subject of litigation.
I talk about this above, but neither the President nor the SEC Commissioners have the authority to implement this change with the snap of their fingers. Any change to federal administrative rules must go through the rulemaking process. Agencies derive their authority to enact rules from laws enacted by Congress which set the parameters of their rulemaking authority. And the process is long, detailed, and subject to several checks including judicial review.