Are Buybacks Really Shortchanging Investment?

It’s no secret that the American economy is suffering from the twin ills of slow growth and rising income inequality. Many lay the blame at the doors of America’s largest public corporations. The charge? These firms prefer to distribute cash generated from their businesses to shareholders through stock buybacks and dividends rather than invest for the long term, undermining job growth and putting the country’s economic future at risk, often pointing to the high ratio of shareholder payouts to net income. These claims are at odds with corporate leaders' statements about their commitment to long-term success. To understand the disconnect, we examine how S&P500 companies are actually allocating capital and show that firms are in fact plowing substantial amounts of capital into R&D and CAPEX. Moreover, we explain that the ratio of dividends and stock repurchases to net income is misleading and ignores two important factors: first, focusing on dividends and buybacks ignores the substantial (direct and indirect) equity issuances firms engage in; second, net income is a poor metric of income potentially available for investment. Taking these factors into account, we show that the data does not support the view that excessive payouts are draining corporations of investment capacity.