On Tuesday, Senator Elizabeth Warren criticized stock repurchases, as market manipulation did to inflate executive salaries, calling them a misuse of excess corporate profits that could be reinvested in a business or workers .
Asked by CNBC’s Joe Kernen, whether the repurchases could be totally bad if they increased the value of existing shares held by longtime investors or retirement funds, Warren doubled in volume.
“This is nothing more than paper manipulation. ‘Is everyone better’? Listen to yourself!” she told the co-host of the “Squawk Box”. “Nothing has changed in the business. They are still producing the same number of widgets at the same cost and selling them to the same customers.”
She argued that stock repurchases do nothing to improve the quality of a business or the goods and services it produces.
“They have a little bit of a mess in their stock. And how did they do that? Taking the excess money and saying, ‘Wow, we can’t find anything to do with that money. We are not going to return it to our investors. We are going to take the investment decision that the only investment in America that makes any sense is to buy back our own shares. ‘”
Presidential candidate Elizabeth Warren speaks to her supporters in Manchester.
Preston Ehrler | LightRocket | Getty Images
Instead, she said that repurchases are a convenient way to inject residual corporate profits into the market in order to increase the wealth of the company’s main shareholders, who often include executives and corporate management.
Squawk Box co-host Becky Quick asked Warren to explain the difference between a corporate board that approves a billion-dollar stock buyback program and a business partner buying a partner who wants to sell his equity in your hypothetical company.
“If you want to buy your partner’s shares and want to keep your partner’s shares, that’s fine,” said Warren. “But that is not what stock repurchases are. Stock repurchases are entering the market and raising the price of their shares using their own money, not to invest in business.”
The Massachusetts Democrat suggested that quarterly dividends are a better and less manipulative way to return corporate money to shareholders.
Repurchases and dividends are considered two of the most proactive ways for a company to return wealth to its shareholders and to reinvest the excess cash itself. When a company repurchases outstanding shares, it decreases those available on the market and the relative share of ownership of each existing investor increases.
The stated motivations for repurchases vary, but they almost always result from management’s belief that the market is incorrectly underestimating a promising deal. Berkshire Hathaway CEO and billionaire investor Warren Buffett has for years praised the benefits of repurchases, which, he said, allow management to return capital only when it feels the market is underestimating the business.
“In no way do we think Berkshire shares should be repurchased simply at any price,” Buffett said in his annual letter to stakeholders, published on Saturday. “I emphasize this point because American CEOs have an embarrassing record of dedicating more company funds to repurchases when prices have increased than when they have plummeted. Our approach is just the opposite.”
Warren’s opposition to repurchases – as well as his advocacy for better business practices and worker protection – is not new. Warren, a member of the Senate Banking Committee, defended legislation that requires companies with more than $ 1 billion in revenue to allow their employees to elect 40% of their seats on the board.
Warren’s appearance on CNBC came a day after she and Sen. Bernie Sanders, I-Vt., Proposed a total annual tax of 3% on wealth in excess of $ 1 billion. They also asked for a lower wealth tax of 2% per annum on the net worth of families and trusts ranging from $ 50 million to $ 1 billion.
The stated aim of the Ultra-Millionaire Tax Act is to narrow the widening gap in US wealth, the asset gap between the wealthiest and the poorest families. The gap continued to widen amid the Covid-19 pandemic, as higher-income jobs recover faster than the lower-wage labor market.
About 100,000 Americans would be subject to a fortune tax in 2023, according to Emmanuel Saez and Gabriel Zucman, economists at the University of California at Berkeley and Warren’s advisers.