buybacks Markets S&P 500 stocks

Goldman Wants To Talk To You About Buybacks Because You’ve Got This All Wrong, Ok?

"Popular misperceptions" and such.

When it comes to politically-sensitive market topics, you’d be hard-pressed to find an issue that garners more attention among enterprising lawmakers than buybacks.

Criticizing corporate cash usage is a great way to prove your liberal bonafides and that goes double and triple in the current environment, characterized as it is by relentless scrutiny of how management teams “spent” the windfall from the Trump tax cuts.

Admittedly, I’ve soured a bit on this issue or at least soured on the idea that anyone who fancies themselves a keen observer of markets is compelled to weigh in at least once a week on the purportedly nefarious practice of eschewing other uses of cash in favor of EPS-inflating share repurchases.

To be clear, there is little question that post-crisis monetary policy and the tyranny of the next earnings report are at least partially responsible for a buyback bonanza that has manifested itself in a situation where the corporate bid has for years comprised the largest source of US equity demand. Additionally, there is no question that the tax cuts incentivized still more buybacks. Further, money spent buying back shares could have been spent on other things, because that’s how money works. Finally, it is by no means obvious that leveraging the balance sheet in order to repurchase shares at the tail-end of the longest bull market in history is advisable, even if the cost of debt is very low.

All of that said, it has become impossible to separate political grandstanding from honest criticism when it comes to demonizing buybacks. On the other side of the debate, it’s equally difficult to discern whether those who malign political grandstanding are actually interested in absolving buybacks with good arguments or are in fact just writing to express their disgust with the hyper-politicizing of the debate in general. The former is a worthwhile enterprise, while the latter is tantamount to saying nothing, because in today’s America, every issue is hyper-politicized.

And so, I’ve generally erred on the side of letting everyone else sort this out by shrieking at each other on Twitter, the go-to venue when you want to express yourself in terms that you doubtlessly would be too shy to use were the debate taking place in person.

But, given that he showed up on CNBC this week to try and dispel what he thinks are popular misconceptions, I thought I’d highlight some passages and visuals from a note by Goldman’s David Kostin, who isn’t sure you (where “you” means “everybody”) understand everything you need to understand when you set out to castigate share repurchases.

First, Kostin notes that between capex and R&D, growth investment has “accounted for the largest share of US corporate cash outlays every year since at least 1990.” Here is a bit more color from the note, dated last week:

Growth investment has accounted for the largest share of US corporate cash outlays every year since at least 1990. This fact is contrary to the popular belief advanced by some politicians that buybacks dominate corporate spending. For the past 30 years, corporate cash spending devoted to capital projects and research and development initiatives has consistently equaled roughly 10% of sales. During 2018, S&P 500 firms increased capex and R&D spending by 13% to $1.1 trillion, equal to 11% of annual sales.

Next, Goldman reminds you that returning cash to shareholders is “not a new phenomenon.” Rather, it’s been going on for at least the last several years, where “several” actually means 139 – years. It’s true that the composition of those payouts has changed, but since 1880, the average S&P 500 cash return payout ratio (i.e., dividends + net buybacks / net income) is 73%. We’re above that now, but not by a margin that one would consider “alarming”.



After noting that “the number of S&P 500 firms repurchasing at least some of their shares during the prior 12 months has risen from 196 in 1992 to 424 in 2018”, Kostin reminds you that explaining why management teams over the past two decades have embraced buybacks versus dividends is fairly straightforward – you can stop spending cash on share repurchases without suffering the kind of backlash that generally accompanies a dividend cut. In an environment where earnings volatility is high, that kind of flexibility is highly desirable.



“When earnings drop sharply, managements can easily reduce the cash spent on buybacks without disrupting dividend policy”, Kostin writes, adding that by contrast, “investors expect steady growth in regular dividends and do not take kindly to firms that cut dividends per share.”

Kostin goes on to provide a straightforward assessment of the impact of tax reform on buybacks, calling share repurchases “an efficient way for many companies to use repatriated funds.” Here’s the money line from that section:

In 2018, buyback spending jumped by $279 billion or 52% above the prior year’s level. Just 20 stocks in the S&P 500 index accounted for 38% of the $819 billion in aggregate cash spent to repurchase shares. However, those firms represented fully 69% of the overall increase in share buybacks! Unsurprisingly, these companies also had the largest amount of earnings trapped overseas.


Finally – and this is where the rubber meets the proverbial road – Goldman dispels the notion that perverse incentives are behind buybacks. Or at least the bank makes a run at dispelling that notion.

“One of the greatest misconceptions in the public discourse surrounding corporate buybacks is the belief that managements only repurchase stock in an attempt to inflate EPS and meet incentive compensation targets”, Kostin writes. That’s a bit of a strawman (i.e., I’m not sure it’s accurate to say that anyone believes the “only” reason companies repurchase shares is to inflate the bottom line and equity-linked compensation), but it captures the gist of the most pointed critique of share repurchases.

Here is the reality of this situation, from Goldman’s analysis:

Contrary to popular belief, the 247 companies in the S&P 500 with incentive compensation programs linked to earnings per share – a metric that would benefit from accretive share buybacks – actually spent a smaller share (28%) of their total cash outlays on repurchasing stock compared with the 253 firms without a performance metric linked to EPS (32%). Moreover, the 49% of S&P 500 firms with EPS-linked compensation accounted for just 44% of total 2018 buybacks ($360 billion).


Oh, and as far as whether share repurchases are crowding out investment for growth, Kostin writes that while buybacks “soared by 52% in 2018, capex grew by 14% and R&D by 11%.” That is the briskest pace of capex growth since 2011 and the swiftest pace of R&D growth in a dozen years.

You can make of all this what you will and if you’re so inclined, you can spend hours trying to poke holes in the analysis. But the bottom line is that there are quite a few “misperceptions” floating around out there and if you’re the type who likes videos, here’s Kostin’s CNBC appearance where he discusses those misperceptions:

15 comments on “Goldman Wants To Talk To You About Buybacks Because You’ve Got This All Wrong, Ok?

  1. All true but the tax cuts in corporate rates were touted as a way to unleash investment in productive plant, equipment, software, and employee compensation etc. not buybacks. Corporations are paying a declining share of overall tax revenue taxes for years in the US. If you are going to cut corporate tax rates and the tax take of the US government from this source, perhaps a tax increase in long term capital gains is warranted plus an increase in holding period to qualify as long term.

  2. Funding by the government (partially thru tax cuts) of buybacks is the part of MMT that the leaders at Goldman et al can support. But when MMT means funding for the benefit of most of the ciitizenry it is, according to the Goldman’s of the world, not a good idea. The merits of MMT, buybacks, and other government debt funded programs seem to depend on personal perspective not on any measure of economic benefit for society.

  3. Harvey Darrow Cotton

    Wait a minute! You know, I…I think the Goldman Group has a corporate trading desk that executes share buybacks! Forgive my uncouth tinfoil hat, but I think this may just make them slightly less than vigorously objective.

    To paraphrase Scott Galloway, this isn’t exactly Starbucks railing against offshore drilling, because that isn’t where their bread is buttered. This is Starbucks giving us the health benefits of coffee. Share buybacks are exactly what it is says on the tin. Share price manipulation. And who benefits from that? Share owners, executives who benefit materially from enhanced share prices and EPS, and companies that execute the trades for a fee.

    • Never mind the data presented in the actual analysis, right? Care to refute any of that? Or are you content to point to the buyback execution desk and shout: “We have found a witch! May we burn her?!”

        • Harvey Darrow Cotton

          Are…are you kidding right now? Is this a test?

          “The 247 firms in the S&P 500 Index with EPS-linked incentive pay plans spent 28% of their total cash outlays on share repurchases last year, while the other firms that don’t link payoffs to EPS performance allocated 32% on buybacks, the bank found.”

          That is statistical noise. Some firms, on average, spent lightly less than other firms with exactly ONE control? Not total stock compensation. Not capital gains for corporate officers selling with a smaller supply of shares available. No. Some firms – in aggregate – spent slightly less than other firms. According to data from the company who gets fees from buybacks in a political backdrop where buybacks are under ever greater scrutiny. And from this data, we can therefore dismiss the importance of EPS driven bonuses…because squiggles. Alrighty. If that is good enough to convince you.

          I mean, if I sold seeds, I wouldn’t care if you planted them or ate them.

  4. Point being, you pretend to be speaking the “truth” to an audience here that you imagine doesn’t understand self-evident things.

    This isn’t a site centered around a daily charade where we all wake up every morning and pretend like we forgot what Wall Street is and what Wall Street does so we can feign being indignant about it all over again and pretend like we’re mad.

    This is a site where we all accept reality for what it is, and then go and find nuance on top of that baseline reality.

    Are you also going to stand up and point the finger at politicians who decry buybacks and state the obvious there too using the same Starbucks metaphor? i.e., are you going to say: “This criticism is exactly what it says on the tin: politicians who don’t give a damn about buybacks one way or another, but who are just interested in getting votes by shrieking about it on the campaign trail”?

  5. Harvey Darrow Cotton

    If I was being Gundlachian in stating obvious things, I don’t understand the initial pushback. I disagreed with the initial premise, pointed out the obvious conflict of interest which wasn’t mentioned above, and was told for five years you made meth for the sake of the family. Then I pointed out that the datums were, in fact, politically driven, useless agitprop and now you tell me that you obviously and always made meth because you liked it.

    Okay, fair enough. But I didn’t say a word about the merits of the points of politicians. Scott Galloway is a professor and entrepreneur. Left-leaning, but not a pol. He used that Starbucks analogy to decry Apple blasting Facebook’s use of data, which Apple can do because they do not really make money from data.

    If there was a study that said that people who ate Big Macs and McRibs on a regular basis had lower cholesterol and longer life spans, even if presented with lots of charts, I would be skeptical. If that same study used one control and didn’t take into account time, place, diet, healthcare access, level of exercise, age, income, etc., it would be useless. If it was commissioned by a lobbying firm paid for by McDonald’s, it would be dismissed. If it was actually made by Ronald McDonald in crayon, only Jeff Gundlach would bother dismissing it…

  6. NebulousWhiteCloud

    yes to the McRib

  7. Anonymous

    The only reason this has become an “issue” is that a handful of politicians politicized the capital allocation preferences of U.S. corporations. They would prefer to see dividends paid out so they can collect taxes (for the second time) on corporate profits to fund their pet programs. In their minds, all fruits of production belong to government and they should decide what is kept in the private sector.

    This is purely an issue for management and shareholders to determine. By what reasoning is this even an issue in the public arena? What’s next? Will E. Warren and C. Schumer tell Apple how many iPhones they should produce/sell every quarter? I mean this should be matter of public policy too because if Apple sells more phones this means more tax revenue to spend on free education for all or more bank regulation.

    • And see, this comment underscores why I tend to deviate a bit from my unabashedly liberal stance when it comes to the buyback debate.

      Some of this is clearly political grandstanding. I think critics are mostly correct. But “mostly” here isn’t as clear cut from my perspective as it is on a lot of other issues where I almost always side with Democrats. That is, I’m not entirely sure I want politicians telling corporate management teams how to allocate cash.

      What I would rather is that Congress doesn’t do silly things that exacerbate this situation. For instance, we didn’t need debt-funded tax cuts and debt-funded stimulus in a late-cycle environment when unemployment is sitting at a 48-year low. Had Congress not agreed to that insanity, the buyback issue wouldn’t be as contentious as it is right now.

      Point being: if Congress acts responsibly on things that are its purview, it eliminates the necessity of reaching into things that aren’t.

      • just to expand on that, if you want to rethink capitalism from the top down, well then fine. change the system in a way that rewards labor and doesn’t perpetually incentivize capital.

        but you can’t constantly perpetuate a system that rewards capital and then act surprised that capital does what capital is prone to doing in that kind of system.

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