The stock market would be trading at a much lower rate if not for the companies buying back their shares. Buybacks have received a bad reputation among the Democrat and Republican lawmakers.
According to compiled data from Ned Davis Research, S&P 500 was supposed to be 19 percent less if there are no buybacks. The researchers have compared the S&P 500’s performance in the first four months of 2011 against the initial three months of the current year. To get that conclusion, they have checked the difference between the amount of the final monthly repurchases. During that time, the broad market is 125% greater than the net buyback’s $3.5 trillion.
Ned Davis Research’s chief U.S. strategist, Ed Clissold noted, “Without focusing too much on numbers, we can say that the S&P 500 index would probably be lower today if not for buybacks versus other uses of cash.”
Lawmakers Don’t Like It
Both the Democrat and Republican lawmakers are criticizing buybacks and agreed to make own stock repurchasing harder for the companies. They claim that buybacks increase the share price, as well as the pay of corporate executives at the cost of the workers of the company.
Senator Charles Schumer, D-NY posted on Medium on February 20 that says, “companies should reinvest their capital differently.” Early the same month, Schumer and Senator Bernie Sanders, I-VT (a presidential hopeful) suggested in the op-ed of a publication that the companies should offer health benefits and living wages to its employees once a buyback scheme is started.
The lawmakers wrote in the op-ed, “At a time of huge income and wealth inequality, Americans should be outraged that these profitable corporations are laying off workers while spending billions of dollars to boost their stock’s value to further enrich the wealthy few.”
In a series of tweets, Sen. Marco Rubio, R-FL, said that the U.S. doesn’t have a “free market.” “We have tax code which engineers economy in favor of inflating prices of shares at the expense of future productivity & job creation,” Rubio noted.
However, while the politicians ask to lessen the buybacks, the stock market is supposed to be trading under the current levels is the extra cash have been used in different ways. The researchers have found that the S&P 500 could go 10 percent lower if the extra cash were utilized at the dividends instead of using it on buybacks.
If the buybacks were used as substitutes for the reinvestments of the corporate, the broad index could go down two percent. On the other hand, the broad index could plunge five percent if they don’t use the extra cash.
Kate Warne, an investment strategist at Edward Jones, says, “Companies have been using buybacks because it allows them to put capital to better use and back in the hands of investors without committing to making those payments overtime.” “We like buybacks, (though) we prefer dividends,” she added.