Commerce Secretary Gina Raimondo is determined not to let America’s tech giants play her for a fool. If they want taxpayer money under the CHIPS and Science Act, they will need to promise not to turn around and give the money to their shareholders through dividends or share repurchases.
I think that makes good sense. On the other hand, sometimes companies should pay dividends or buy back shares. Those are two of the main ways that they reward their shareholders — who are, after all, the owners — rather than sit on excess cash or spend it wastefully.
So when dividends and buybacks are good and when they’re bad turns out to be a really interesting question. I can’t fully answer it here but I want to look at some aspects of the debate.
Seven congressional Democrats, including Senator Elizabeth Warren, and independent Senator Bernie Sanders wrote a letter to the CHIPS program office on Feb. 10, copying Raimondo, reminding it of Raimondo’s promise last year that “CHIPS money is not a subsidy for big companies to make them more profitable.”
The eight made a solid point: Money is fungible. Even though the CHIPS and Science Act prohibits program money from being used for dividends or buybacks, companies could thwart the law’s intent by stuffing the program money into one pocket and paying for dividends and buybacks out of a different pocket. To prevent such “accounting mischief,” they said awardees should be barred from buying back shares for 10 years “or, for longer-term projects, the length of the project.”
The standard unveiled by the CHIPS program office on Feb. 28 doesn’t go as far as the Democratic lawmakers wanted. It requires applicants to “detail their intentions with respect to stock buybacks over five years, including whether they intend to refrain from or limit them,” with preference given to those that “credibly commit to investing in the domestic semiconductor industry.”
I have to think Raimondo’s people worried that key companies wouldn’t participate in the program if the conditions were too restrictive. Companies really, really like rewarding their shareholders: The Democrats’ letter cites a study by Lenore Palladino of the University of Massachusetts Amherst finding that “the largest semiconductor companies — Intel, IBM, Qualcomm, Texas Instruments and Broadcom — spent 71 percent of their net income on stock buybacks alone from 2011 to 2020.”
Stripped to its essentials, the CHIPS and Science Act is trying to induce a bunch of multinational corporations that have headquarters in the United States but customers and shareholders all over the world to take pro-American actions that they wouldn’t take if left to their own devices. What Raimondo is up against is what Robert Reich wrote in 1990, which I used in my quote of the day on Friday: “So who is us? The answer is, the American work force, the American people, but not particularly the American corporation.”
I’m a lot less concerned about dividends and buybacks when they’re not being funded with taxpayer dollars. It’s good for companies to give money back to their shareholders when they don’t see any productive uses for it. The shareholders may spend the money on themselves, which is OK, or they may help fund a start-up that has world-changing prospects, which would be better.
President Biden does have concerns about buybacks that go well beyond the CHIPS and Science Act. In his State of the Union address he called for quadrupling the new 1 percent tax on buybacks to encourage long-term investments. But it’s not clear that the tax would get the results he wants. For one thing, companies could simply switch from buybacks to dividends.
Even if they retain the earnings, it’s not clear that companies would use them to rebuild the American economy. They might raise executive salaries, or build plants overseas or do stupid things at home like venture into businesses they don’t understand. Austin Graff, the founder and chief investment officer of Opal Capital, said he invests in companies that pay high and reliable dividends because the payouts prevent management from doing things with the money that aren’t in the shareholders’ best interest.
It’s true that companies often waste money by buying back their shares at high prices, as detailed in an article co-written by William Lazonick, the president of the Academic-Industry Research Network and a professor emeritus of economics at the University of Massachusetts Lowell. That’s dumb. In an article for the Institute for New Economic Thinking last month, Lazonick and Marie Carpenter singled out Cisco Systems, the networking company.
“From October 2001 through October 2022, Cisco spent $152.3 billion — 95 percent of its net income over the period — on stock buybacks for the purpose of propping up its stock price,” Lazonick and Carpenter wrote. “These funds wasted in pursuit of ‘maximizing shareholder value’ were on top of the $55.5 billion that Cisco paid out to shareholders in dividends, representing an additional 35 percent of net income.” (A Cisco spokeswoman, Robyn Blum, replied in an email that “Cisco innovation sits at the heart of the major technology market shifts,” adding that “the primary focus of our capital allocation strategy is to support the growth of the company by investing in innovation — both organic and inorganic.”)
One reason to worry less about buybacks is that if a company weakens itself, eventually driving down the stock, by overspending on dividends and buybacks, the shareholders who stay are the main ones harmed. They have every interest in throwing the bums off the board. The incentives of capitalism are aligned with the incentives of the public.
Apple has returned more than 90 percent of its free cash flow to investors through stock buybacks and dividends over the past decade, a total of more than $600 billion, without weakening itself, wrote Ben Hunt, a co-founder of the money management firm Second Foundation Partners, in November for the company’s Epsilon Theory website.
I mostly agree with Warren Buffett, the chairman of Berkshire Hathaway, which is a major shareholder in Apple. Buffett wrote to shareholders in his annual letter last month that when a company buys back some of its shares, those who sell benefit because they prefer cash to shares, while those who don’t sell also benefit because they prefer shares to cash. Buffett wrote, “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to C.E.O.s, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”
Are buybacks always good? No. Always bad? Also no.
Outlook: Ozge Akinci, Gianluca Benigno, Serra Pelin and Jonathan Turek
When the dollar strengthens, the global economy cools off. And when the global economy cools off, the dollar strengthens more. That’s the “dollar’s imperial cycle,” according to new research by Ozge Akinci of the New York Federal Reserve Bank; Gianluca Benigno of the University of Lausanne; Serra Pelin, a doctoral candidate at the University of California, Berkeley; and Jonathan Turek of the research firm JST Advisors.
The dollar’s importance in global trade and investment vastly exceeds the U.S. share of economic output, the scholars write. Developing nations in particular set prices for their exports in dollars, buy their inputs in dollars and often borrow in dollars. So their economies are harmed when the dollar strengthens. That has spillover effects, lowering global commodity prices and weakening manufacturing around the world, including in the United States. Because the United States is less exposed to trade than most other countries, it’s less harmed, so the dollar strengthens more, continuing the imperial cycle.
This, they write in a blog post about their work, is “a self-fulfilling, pro-cyclical force that governs global macroeconomic developments.”
Quote of the Day
“Predicting the future has always been hard, but these days it’s becoming tricky even to predict the past: The statistical agencies keep making large revisions to older data.”
— Paul Krugman, “Peering Through the Fog of Inflation,” The New York Times (March 3, 2023)
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