The Facts on Stock Buybacks and Dividends
April 25, 2019
Why Do Companies Pursue Stock Buybacks and Dividends?
- Companies rely on investment by individuals and institutions (e.g., pension funds) to finance their operations and grow. These individuals and institutions expect a return on their money.
- Companies must invest their profits to grow – by expanding business lines, investing in research and development (R&D), and attracting and retaining talent.
- At some point companies may run out of opportunities with growth potential to justify deploying profits. In such cases, they often return money to shareholders via buybacks or dividends.
Who Benefits from Stock Buybacks and Dividends?
- Federal Reserve data show that a majority of U.S. households have direct or indirect ownership of stock via pensions, 401(k)s, or investment accounts, all of which benefit from dividends and higher stock prices.
- Seniors are among the biggest beneficiaries, with over half their income is from dividends, 401(k)s, pensions, other investments, according to IRS data.
"Recent proposals to restrict buybacks and dividends, while presumably made with the laudable intent of increasing wages and capital investment, will only make it more difficult to achieve sustained and inclusive economic growth in the United States."
Joint New York Times Op-Ed by Business Roundtable President & CEO Joshua Bolten and Council of Institutional Investors Executive Director Ken Bertsch
How Do Stock Buybacks and Dividends Benefit the U.S. Economy?
- Money returned to shareholders via buybacks and dividends does not disappear from the economy. This money is often redeployed as loans to companies that are hiring and growing, is used for seed money for startups, or is used for financing for emerging technologies.
- Stock buybacks are a sign of strength – not weakness – of the U.S. economy.
Do Buybacks and Dividends Displace Investments in Workers and Capital?
- Buybacks and dividends do not displace investments that firms make to grow and innovate. In 2018, when buybacks and dividends were up significantly, U.S. business investment among also grew at the fastest rate since 2011, with companies investing nearly $3 trillion total, including $460 billion in R&D.
- Data show that S&P 500 companies doing buybacks during 2018 tended to do more investment and R&D than companies electing not to do buybacks, according to Business Roundtable analysis of SEC filings of S&P 500 companies.