Why the Coronavirus Stimulus Is Limiting Stock Buybacks | WSJ

(pleasant mallet percussion music) – [Narrator] On March 27th, President Donald Trump signed a $2 trillion stimulus plan aimed at combating theeconomic consequences of the coronavirus pandemic, but the bailout comeswith strings attached, a ban on share buybacks and dividends for any company receivinga government loan from the stimulus package.

The ban will last the termof the government assistance plus one year.

This clause was added after critics argued that companies like Boeing and airlines have spent too much moneybuying back their own shares from the stock market, money they could've beensaving 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 toencourage stock buybacks.

The purpose of the tax cutwas to encourage companies to bring money home and putit to more productive use in the United States economy.

– [Narrator] In common share buybacks, the company buys backshares on the open market, leaving fewer shares outstanding.

This boosts a metric calledearnings per share, or EPS.

EPS is calculated by takingthe company's net income and dividing it by thenumber 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 buybacksand how they work, but I think the people whosupport them would say, first of all, that theydo benefit shareholders, and shareholders don'thave 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 incentivesystem 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 closelyalign the incentives of CEOS with shareholders, but it also, in theminds of buyback critics, has created perverse incentives where it's also givenCEOs an elevated incentive to worry more about the share price than about long-term investments or investing in their workers.

– [Narrator] Buyback activistssaw the stimulus package as an opportunity toimplement limitations.

The stimulus sets asideat least $50 billion for cargo and passenger airlines and 17 billion forbusinesses 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 thatover the past 10 years, the biggest U.

S.

airlines have spent 96% of their free cash flow onbuying back their own shares.

American Airlines said it'sput considerably more money into capital investments and its team than buybacks in recent years.

The aircraft manufacturerBoeing is also expected to receive aid from the stimulus package.

– So the criticism aboutbuybacks and corporate behavior are aimed at airlines and Boeing and some sectors looking for federal money specifically because they arelooking for federal money.

The argument is that if youare asking taxpayers for funds that, first of all, weneed to attach some strings so you're not abusing that money.

A lot of that is sort of a hangover from the 2008 bailoutswhen there was a feeling of banks got taxpayer funds, then they used it to pay bigbonuses to their executives.

– [Narrator] As buybacks haveincreased in recent years, they've become a contentiousissue in Washington.

– Democrats have long favoredrestrictions on buybacks before this latest crisis, and they see this crisisin a way as an opportunity to begin to impose newgovernment restrictions on them.

Republicans, in general, have taken the opposite point of view, feeling like it's illegitimatefor 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 wayof 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 inclusionof an anti-buybacks clause in the stimulus package is a big win for thosewho oppose buybacks, but even with the stimulus in place, the U.

S.

economy is still shaky.

Because of this, mostcompanies 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, tryingto 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).

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