Buybacks and Dividends

Picture yourself as the CEO of a big, publicly traded company. You want to keep your shareholders happy and justify a big bonus for yourself. One solution is to invest your profits in developing new products, building factories or opening stores. Making money this way is hard: It requires identifying opportunities, managing new initiatives and waiting for them to pay off. An alternative is to give stockholders the cash the company has earned. This is easy: You just buy back some shares or increase dividends. Which is the better thing to do? The answer might be different for you, the company, its stockholders and the economy.

JPMorgan Chase & Co. strategists estimate that gross share repurchases will reach a record of around $800 billion in 2018, up from $530 billion in 2017, a rise spurred in part by the big cut in corporate tax rates passed by Republicans in Congress in December. Along with pumping up bonuses based on stock prices, buybacks make it easier for CEOs to meet quarterly earnings-per-share targets, by reducing the number of shares. They contribute to bull markets: In some years, shares bought in buybacks have outnumbered purchases by mutual funds by as much as 6 to 1. And they mollify activist investors, who have agitated for a piece of companies’ cash hoards. These bonanzas for shareholders, though, have consumed resources that companies might have put into expansion, hiring or raises. Buybacks exceeded capital expenditures over the five years through 2017, while wages stagnated and workers’ share of business income remained near record lows.