The investment in the knowledge base that makes a company competitive goes far beyond R&D expenditures. In fact, in 2018, only 43% of companies in the S&P 500 Index recorded
any R&D expenses, with just 38 companies accounting for
75% of the R&D spending of all 500 companies. Whether or not a firm spends on R&D, all companies have to invest broadly and deeply in the productive capabilities of their employees in order
to remain competitive in global markets.
Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force.
The results are increased income inequity, employment instability, and anemic productivity.
Buybacks’ drain on corporate treasuries has been massive. The 465 companies in the S&P 500 Index in January 2019 that were publicly listed between 2009 and 2018 spent, over that decade,
$4.3 trillion on buybacks, equal to 52% of net income, and another $3.3 trillion on dividends, an additional 39% of net income. In 2018 alone, even with after-tax profits at record levels because of the Republican tax cuts, buybacks by S&P 500 companies reached an astounding 68% of net income, with dividends absorbing another 41%.
Why have U.S. companies done these massive buybacks? With the majority of their compensation coming from
stock options and stock awards,
senior corporate executives have used open-market repurchases to manipulate their companies’ stock prices
to their own benefit and that of others who are in the
business of timing the buying and selling of publicly listed shares. Buybacks enrich these opportunistic
share sellers — investment bankers and hedge-fund managers as well as senior corporate executives — at the expense of employees, as well as continuing shareholders.
