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Roth: Elizabeth Warren should be mad at the Fed, not companies, over share buybacks

Op-ed

The Federal Reserve’s disruption in the market is shifting the way companies behave, including stock buyback programs

Tom Williams/CQ-Roll Call, Inc via Getty Images

Sen. Elizabeth Warren (D-Mass.) makes a lot of outrageous claims, usually directed at companies or productive members of society. In a recent interview, she made another of these claims, this time directed at share buybacks, calling them “market manipulation” and a poor excuse for corporate profits.

Aside from the hilarity of a senator thinking she knows what a good use of any funds might be, let alone corporate profits, Sen. Warren shows either her ignorance of financial concepts or her intention to mislead the public through her vernacular. Moreover, if she is so angry, she should be blaming the Federal Reserve.

Share buybacks are a capital allocation decision for a company. When a public company has generated more cash than it needs for operations, its management seeks to put that money to work to generate a return for shareholders. Sometimes, that cash is used to pay a dividend. This could be a special one-time return of capital to shareholders, or, if the cash generation is projected to be steady over time, an increased dividend payment can be ongoing. Excess capital could also be used to invest in growth projects or for mergers and acquisitions (M&A) to buy other companies.

Back in the day, analysis would often be run (and, as a recovering investment banker, I did many of these), to see if it was more beneficial to company earnings per share for management to pay down company debt (thereby eliminating associated interest payments and increasing the earnings for each share) or to buy back shares of stock (which decreases the number of shares outstanding, thereby increasing earnings per share). Usually, it was only when a company’s stock was substantially undervalued in the market that buying it back would increase the earnings per share more than paying down debt.

The Federal Reserve’s meddling in the market, creating an enormous supply of very cheap debt for companies, has basically thrown this exercise out the window. Big, public companies haven’t had to pay much in terms of interest on debt for almost a decade and a half, thanks to the Fed’s actions helping make debt cheap and readily available. So buybacks today, even at elevated stock prices, factor more heavily into the capital allocation exercise of returning capital to shareholders given the cheap debt landscape.

This brings up several important points. First, that Sen. Warren is conflating capital allocation issues with operating expenses of businesses. There’s nothing manipulative about any of the methods I discussed in seeking to return excess capital to shareholders; the only thing that is changed is the calculation of what makes sense, which has been largely disrupted by the Fed.

Which flows to the second point, which is that by using “tools” like suppressing interest rates and buying up securities to add to its balance sheet, the Federal Reserve has truly manipulated the market, disrupting risk and market signals, giving big companies a huge advantage and helping to transfer more wealth to asset holders at the expense of savers, retirees, and Americans who don’t have much in the way of assets like stocks or real estate.

We don’t need the Fed meddling in the market, and we don’t need Sen. Warren, or anyone in or adjacent to government, telling companies what is best and how to allocate capital or any other aspects of organizing a business or the economy. We need to stop with the government burning down proverbial houses and then offering advice on how to fix them. The market will act efficiently itself and produce strong outcomes that enable economic freedom and wealth creation opportunities for everyone, if it is ever allowed to do so.

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