Why share buybacks are nothing to fear – The Property Chronicle
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Why share buybacks are nothing to fear

The Economist

There’s nothing so dangerous to the public interest as the entire political class agreeing on a single idea. Yet this is what is happening in Washington, DC, about the issue of share buybacks and dividends. That Bernie Sanders or Elizabeth Warren don’t understand how the capitalism works is hardly a surprise. But, as The Telegraph reports, the Republican side is making the same error, with companies enriching their shareholders being labelled by shareholders as “corporate cocaine”. And by that they don’t just mean expensive and boring.

The contention is that if a company makes a profit then it should use that to invest again in what was making that profit. By this logic, returning money to shareholders through dividends, or by buying back outstanding shares, is a waste of that cash that should righteously be used to expand the economy. It’s certainly true that companies are returning money. It depends whose estimates you use but a very large share of corporate profits are flowing to investors. But how serious a problem is this?

The first and most obvious foolishness is the thought that companies shouldn’t be enriching shareholders. That, of course, is the point. People put money into collective endeavours in the hope of gaining more out over time. This is, after all, what funds our pensions and retirements. Given the usual human propensity for greed, the more that’s paid out in such profits the more we’d expect to see being put into investment.

The assumption made by those complaining is that money paid out to investors somehow disappears from the economy. To the extent that there are Scrooge McDucks out there this is true, capital stashed into basements is indeed taken out from general circulation. Thankfully, however, Mr. McDuck is a comic book character, and this doesn’t happen very often in the real world. Those successful investors who receive income from their holdings can only do one of two things with it. They can spend it – creating demand in the economy – or they can invest it again. That it has moved out of a corporate structure does not change this, it just changes who is making that decision.

Even a complaint that the cash will just buy more second-hand stocks or bonds rather than build new productive assets fails – for the decision is just moved one further iteration down the line. There is no leakage, the resources continue to circulate.

The basic contention, that money leaving corporate structures fails to be investment in the future is thus wrong. But we are talking about politics here so of course the situation is worse.

In fact, we positively desire that money move out of large corporations. They’re rather inefficient users of it, you see?

It’s entirely true that we’d like to see investment happening. It’s one of the GDP components for example, it boosts the economy. Investment today creates that economy of the future – we’ve got to build what we want to use tomorrow. We’d like that research, those new products. We also know what it is that raises wages, jobs and lots of them. Given that we like rising wages we’d therefore like to see that investment in those jobs of tomorrow. Which brings us to the great truth about job creation, invention and innovation.

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