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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