Feb 17, 2019

Stock buybacks will be a hot-button 2020 issue

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Data: FactSet; Chart: Naema Ahmed/Axios

Stock buybacks have suddenly become a hot-button political issue on both sides of the aisle. A subject you might normally expect to occupy a breakout panel discussion in a CFO convention is now set to become central to the 2020 presidential campaign.

  • Sens. Chuck Schumer (D-N.Y.) and Bernie Sanders (I-Vt.) are sponsoring a bill that would require companies to pay all their workers at least $15 an hour before being able to buy back their stock. Employees would also need to have health benefits and 7 days of paid sick leave.
  • Sen. Marco Rubio (R-Fla.) says he's going to introduce a bill taxing buybacks as dividends. No one knows how this could possibly work in practice, especially in a world of mutual funds and ETFs. (The original idea surfaced in 1952, a much simpler world, and even then it was hard to work out how to levy income tax on shareholders who receive no cash distribution.)

The big picture: Buybacks are extremely popular in corporate America, which spent some $1 trillion on them last year.

  • Apple's share count has fallen from 6.6 billion to 4.7 billion since late 2012, an astonishing drop not only in terms of dollars spent but also in the percentage of outstanding shares bought back.
  • Other companies like Yum Brands, which owns Taco Bell, KFC and Pizza Hut, have seen their number of shares outstanding fall even more, albeit over a longer time horizon.
  • Most companies see their share count increase over time, as they issue new stock for compensation purposes and for acquisitions.

My thought bubble: Rubio is correct that since buybacks are economically equivalent to dividends, it makes sense that their tax treatment should be identical. What's more, buybacks are governed by federal law, unlike dividends, and are therefore easier to legislate against. But banning them outright would be easier than the contortions that Schumer, Sanders and Rubio are about to get themselves into.

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