Congress Set to Curb Buybacks Of Shares -- WSJ
March 26 2020 - 3:02AM
Dow Jones News
Move comes after President Trump joined Democrats in criticizing
Wall Street transaction
By Jacob M. Schlesinger
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (March 26, 2020).
Congressional leaders have agreed to impose limits on stock
buybacks and dividend payments for airlines and other companies
receiving aid under the coronavirus-stimulus package, according to
the text of pending legislation circulating on Capitol Hill.
The curbs on the ability of certain firms to reward shareholders
come after President Trump and congressional Democrats demanded
such strings be attached to any funds in the package. The provision
was inserted into a $2-trillion bill hammered out over the past few
days between the administration and top lawmakers.
People familiar with the legislation said it wasn't yet final
and could still change. As of mid-day, the Senate was expected to
vote on the bill later Wednesday, with the House following soon
after.
The restrictions on share repurchases are the culmination of a
yearslong campaign by Democrats and liberal activists to curb the
transaction that has become popular in recent years with corporate
executives and Wall Street.
Defenders say buybacks -- where companies repurchase their own
shares from shareholders -- reward a corporation's owners and
recirculate cash from older firms that have no need for it to
faster-growing upstarts that can put it to more productive use. The
transaction can help boost share prices, by reducing the amount of
stock outstanding and lifting a company's earnings-per-share
benchmark.
Buyback critics say the transaction illustrates flaws in the
modern American economy, where they say executives place a higher
priority on rewarding shareholders than on helping workers,
investing for the long run, or maintaining a financial cushion in
the case of an emergency -- such as the current virus-induced
economic standstill.
The issue has gotten wrapped up in the bailout debate because
some of the most distressed companies seeking aid -- the airlines,
aircraft manufacturer Boeing Co. and the big hotel chains -- all
have spent heavily on buybacks in recent years.
Democrats had been demanding that companies seeking government
funds be forced to pledge that they won't use the money for
shareholder payments. The original draft of the stimulus package,
crafted by Senate Majority Leader Mitch McConnell (R., Ky.), didn't
include such a provision.
Mr. Trump has in recent days repeatedly spoke in favor of the
limits. "I would demand that there be no stock buybacks," the
president said last week during a coronavirus briefing. "I don't
want them taking hundreds of millions of dollars and buying back
their stock, because that does nothing."
The bill specifically says that any company taking the emergency
federal loans or loan guarantees be banned from either buying back
its own stock or paying shareholder dividends, not only for terms
of the loans but for a year after the aid had ended.
The provision is in some ways a response to the backlash
triggered by the last major emergency government bailouts, for the
banks during the 2008-09 financial crisis. Critics said the money
didn't come with sufficient limits on corporate behavior, and
public outrage was triggered by big bonuses paid by some
institutions receiving the funds. The bank bailouts did include
some restrictions on share repurchases and dividend payments.
The aid package does include other new requirements for certain
aid recipients, such as a pledge not to lay off no more than 10% of
their workforce, curbs on executive compensation and limits on
outsourcing and offshoring. But the bill doesn't include other
strings Democrats had sought, such as putting workers on corporate
boards, or, for airlines, reducing carbon emissions.
Activists who have been pushing for the buyback limits praised
the congressional deal. "It's a recognition that shareholder
primacy got us into this mess," said Lenore Palladino, an economist
at the Roosevelt Institute and a leader of the anti-buyback
movement. "To ensure business resilience going forward, and to
ensure public confidence in these bailouts, these restrictions on
dividends and stock buybacks are crucial, " she added.
While symbolically important, the buyback limits may have little
practical impact, at least in the near term. In recognition of the
political controversy over share repurchases, the major airline
CEOs pledged over the weekend not to buy back shares if they got
federal aid. And those companies and others have been scaling back
share repurchases amid the economic and market collapse for
business reasons.
"Buybacks now appear to be on the back burner as liquidity is
number one, " said Howard Silverblatt, senior index analyst at
S&P Dow Jones Indices. "Even when things start to get
better.... buybacks may remain a low priority for companies as they
evaluate their business operations."
Write to Jacob M. Schlesinger at jacob.schlesinger@wsj.com
(END) Dow Jones Newswires
March 26, 2020 02:47 ET (06:47 GMT)
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