Everyone from Matthew Yglesias at Vox to the Economist are worried about massive buybacks and how this means that corporations are just pocketing your cash instead of investing in America.
Yglesias: "It means that the basic link between healthy corporate profits and a healthy middle class is broken."
The Economist: "Share buy-backs - Corporate cocaine"I don't want to even get into the conspiratorial tone with which buybacks are usually treated. It's simply a return of capital to owners, no different than dividends. The main adjustment it does demand from us is that historically dividends were the primary method for returning capital to owners, so that indexes, like the S&P500 or the Dow Jones Industrials, which tracked share prices over time also served as decent proxies for the growth of capital. But, buybacks cause return of capital to be treated, mathematically, like capital gains. Buybacks have gained favor in recent decades. So, in order to compare capital growth to other measures of wealth or income, equity indexes need to be reduced by the amount of buybacks. At this point, return of capital is causing index returns to be overstated by more than 2% per year as a measure of retained capital, which really adds up over time.
I repeat, this is simply a mathematical adjustment that needs to be made for analysis. Total returns are unchanged, except for this arbitrary change in accounting for them.
But, forgetting all the misconceptions surrounding buybacks, the more basic point is: There is NOTHING unusual about the current levels of payouts to equity holders.
Here is an excellent article by the inestimable Aswath Damodaran going over the basics of share buybacks. Here is one of his graphs, showing the total level of corporate payouts to owners over the past 30 years. The level of payouts is slightly below the levels of the 1980s.
I think arguments can be made for either looking at net payouts or gross payouts. But, with net payouts between 3%-4% and gross between 4%-5%, both are moderate.
What if we look at a longer time frame? Here is 150 years of dividend history, from Robert Shiller's data. Keep in mind that this is only dividends. Buybacks have only become popular since the 1980's, so we would compare these payouts to the gross payouts from Damodaran's graph, which were around 6% in the 1980's, dipped to 2% to 3% in the 1990's, and are back up to around 4%-5%. Historically, payout ratios have rarely fallen much below 4%. If anything, there is a long term downward trend in payouts to owners, following a range that current levels fall squarely within.
How can there be so many topics where so many people are so confident about things that just obviously aren't so? Would it be a shocking coincidence if the bad guys in these stories were predictable?
How much human misery has been caused by people who got in the habit of believing things, not based on whether they were true or false, but based on whether they had a predetermined bad guy? It's kind of the story of human history, isn't it? I'm excited about biotech, AI, robotics, nanotech, and everything else, but, man, the real breakthrough would be if someone invented a way to point this bias out to each of us in a way that would make us say, "Oh, geez. You're totally right. That is what I'm doing. I will now update my beliefs with this in mind. Thank you." Human progress would explode. The main reason the singularity will happen is because, frankly, the bar is set very low - and I don't exclude myself. We all purposefully develop strong convictions through gross avoidance of evidence. It may be the core identifying feature of humanity.