Front Burner - Can Canada afford big corporate stock buybacks?

Episode Date: February 27, 2023

Loblaw Companies, the country’s biggest grocery chain, reported its finances for 2022 on Thursday. In a year when Canadians felt the squeeze from skyrocketing grocery bills increased by inflation, the retailer posted net earnings of $2.3 billion dollars. Also in 2022, Loblaw spent $1.3-billion on something called stock buybacks, which pulls shares off the market and tends to pump up the prices of those still held by investors and executives. Loblaw isn’t alone in carrying out billion-dollar share buybacks. Today, CBC business journalist Pete Evans returns to explain why so many buybacks are happening, and why critics say they’re happening at the expense of Canadian workers, customers and productivity. For transcripts of this series, please visit: https://www.cbc.ca/radio/frontburner/transcripts

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jodi Martinson in for Jamie Poisson. On Thursday, Loblaw Companies, the country's biggest grocery chain, posted its annual report. And in 2022, a year when Canadians felt the squeeze from skyrocketing grocery bills increased by inflation, Canadians felt the squeeze from skyrocketing grocery bills increased by inflation. Loblaw posted net earnings of $2.3 billion.

Also in 2022, Loblaw spent $1.3 billion on something called stock buybacks, a tool that tends to make investors and executives richer. Loblaw isn't alone in carrying out billion-dollar share buybacks. It's increasingly common among Canada's biggest companies. You see it in the oil sector, which has also been enjoying massive profits. But it's happening in other industries as well. Last year, Reuters reported that Canadian companies had repurchased nearly $70 billion in shares. Critics of these share buybacks say they benefit investors and executives

while workers struggle to see their wages increase and customers get squeezed for the profits to make them happen. So to help me pick through this issue, I've got CBC Business journalist Pete Evans back on the show. Hi, Pete. Welcome back to FrontBurner. Hey, thanks for having me. So before we get into how this is an issue that affects more than just the wallets of investors, but potentially really anyone who works for or shops with companies that do this.

Let's start with the basics. What is a share buyback? Sure. So a share buyback, as the name implies, is when a company that has shares that trade on a stock exchange buys back its own shares. So instead of selling shares of itself to investors, saying, would you like to invest in our company and have a share of the profits?

They're taking shares that exist on the stock market and buying them back so they no longer exist. You know, they used to be, you know, 1 million shares in this company. They're going to buy back 100,000. Now there's only going to be 900,000 shares of that company that are available for the public to buy from the stock market. Okay. And so that means that by decreasing the total number of shares that the company has available on the market, they're actually increasing the value of each one, right? The price of each one. Yeah. I mean, if you think about a company as being kind of like a pie, to use my example, again, a company with like a million shares, if you're going to buy one share, that means you're getting one millionth of the company, right? that means you're getting one millionth of the company, right? So if like whatever happens to the company, if they make money, they make profit, whatever, you get one millionth of a stake in that. If that pie stays the same size, but it's cut into fewer slices, then all of a sudden your

slice of the pie is bigger. Even if the underlying taste and flavor and texture of the pie is the same, you're getting more of that pie. There's the same amount of pie and just sort of more of it belongs to you. The pie hasn't changed, just your share of it has changed. Exactly. So who generally benefits from stock buybacks? I mean, there's no one who benefits from stock buybacks except for investors. That's going to filter all the way down to small investors putting a little bit of money in their RRSP and TFSAs, all the way up to sort of executives of the company, like sort of CEOs and mid-managers and get stock-based compensation. But yeah, generally the only person who's going

to benefit from a buyback is someone who owns the shares that the company is buying back from them. They get a one-time or perhaps ongoing bump in the price of their asset, but there's no sort of long-term benefit to the overall profitability or sort of outlook for the company's business. So in a company's term, it's not like you became a faster, more efficient, bigger company making a better product. You're the same company. It's just the stock price that's changed. You're not making more pies.

You're not making better pies. It's just the same pie cut in a different way. We've been hearing a lot about record corporate profits in this past year, and really particularly in the oil sector. We had an episode about that earlier this month. So for a company that has turned a big profit, aside from doing a share buyback, what else could they do with that extra money? And when they have this sort of pile of cash, you can sort of do a bunch of different things. You can, you know, give it to your employees in the form of higher wages, you could hire more people, you could maybe build another factory, spend it on cybersecurity,

IT, that kind of stuff. Like reinvest in your business. Yeah, exactly. Let's, you know, let's say you make widgets, you could sort of, you know, like build a second widget factory, or you could like, you know, hire more people to work the line on your existing factory, or you could pay to build a better website. Yeah. And one of these investors love is sort of say, look, if this company XYZ is making so much money, that's my money, give it to me. Sometimes you can give it to the investors in the form of dividends, which is just like a straight old cash payout. But in the last sort of 10, 20 or more years or so, one of the more popular ways of spending this excess cash is to buy back shares, which basically means it causes the company to look even more profitable than it might be because

you're taking that pie of the company and dividing it into smaller and smaller slices so that each slice looks even tastier than it would have before. Okay. And I guess other things that companies could do is they could pay workers more or they could decrease the cost that we're paying for their goods and services. that we're paying for their goods and services? They absolutely could. If a company made hundreds of millions of dollars, they could say, we're going to give this out in bonuses or raises, or indeed, yes, they could lower their prices to consumers. That's, for many obvious reasons, probably their least favorite form of doing that in our capitalist system.

But basically, buybacks tend to be a thing that companies do at the end when they say, we've done all the other things we want to do. We've spent the money we want to. We have this extra money sitting around. If we don't do something efficient with it, we're going to have to horrifyingly pay taxes on it. So let's find something we can do with it to make that not happen. And you talk about the idea that you have the same pie, but you just cut it up differently and it looks, each share looks bigger. And so that has a benefit to many executives, does it not? Yeah. One of the factors that's sort of really driven share buybacks in the last sort of several decades is that this rise of sort of stock-based compensation. There's this sort of view on Wall Street that I want the manager, the CEO of my company to have his own money invested in the company. So he has an incentive for the company to do well. So that sounds great in theory, but the problem with

some of these share buybacks is, you know, you'll say the CEO, say the company stock is worth $10 and he'll say, you get a bonus of a hundred million dollars if our stock is worth $20 on this date in the future. He now has a financial incentive to be like, hmm, if I can somehow sort of use financial alchemy to make it so that our stock price is worth $20, I can sort of stand to benefit more. So if you're on that sort of $19 cusp, he has a pretty large incentive to make it hit that trigger for him. The sort of the opposite converse side of buybacks is that often companies are doing things on both ends. Like they're sort of buying back their own shares on the public market, even as they're handing out things like stock options to their

executives and to their middle management ranks. So they're using company funds to buy back shares on the public and then handing those things out in terms of stock-based rewards to a certain small group. So yeah, they're especially good for people who get these huge chunks of stock-based compensation. Okay, and so for a U.S. example, we also talked about Norfolk Southern on the show last week, and that's the rail company behind the train carrying toxic chemicals that crashed in Ohio. And Norfolk Southern has actually been buying back shares too, right? Yeah, they bought about $3 billion last year and about the same the year before. I mean, that's, again, very profitable business.

It's generally seen as being recession-proof. So, you know, like many companies, they had a bunch of money hanging around. They thought, well, there's nothing else we need to do. We can't, you know, like build more lines or whatever else or buy more trains right now. Let's give it back to shareholders. Senator Sherrod Brown over the weekend did an interview on television, said, quote,

it's the same old story. Corporations do stock buybacks. They do big dividend checks. They lay off workers. Goes on to say these things are happening because the railroads are simply not investing the way they should in car safety and the rail lines themselves. Well, as I noted, we invest over a billion dollars a year

in our safety program, in the form of maintenance, in the form of equipment, in the form of technology. There's more to be done, you know, as you can imagine. Meanwhile, these people in central Ohio are scrambling to figure out, you know, what happened, who's going to pay for it, how are we going to clean it up. That's $3 billion they spent giving to shareholders. That might be handy money right now trying to clean up this river. But that money's gone because they made that choice then. And so I know in the U.S., buybacks really started to take off during the Reagan years in the 80s. That's our economic program for the next four years. We're going to turn the bull loose.

But that was after decades of restrictions that meant buybacks weren't really happening. And I also understand that has basically continued to increase up to this point. So how has the experience here in Canada compared to what we've seen in the United States? Most of the money on buybacks is happening in the US, but it is happening more and more in Canada. I don't think it's sort of a thing where we're laggards or ahead of the game on. It's more that, you know, companies look south and they think, well, this is a great way of sort of improving our stock performance. We're certainly seeing it more and more. I mean, it'll be at the same scale, but it certainly has traveled north of the border.

Let's talk a little bit about what happened around some of the COVID-era emergency wage subsidies. So there was a report that came out from a group called Canadians for Tax Fairness, and the report counted 37 companies that received these government subsidies. Specifically, those who had the biggest gap in terms of what they reported as revenue to shareholders compared to what they reported to the CRA. They include rail corporations, asset management groups, energy corporations and telecoms. CTF found that of the 37 corporations examined that took the wage subsidy, 32 bought back stock. And then found that between them, most of those companies did buybacks in 2020 and 2021,

the COVID years. That totaled more than $41 billion for those two years. So it's not really clear in the report how much money they received in government cash. But is this the sort of thing that has people especially sour to the idea of buybacks, that a company could receive government money because of hardship due to the pandemic, and instead of using that to invest in their company, turn around and buy back shares? Yeah, I mean, one of the fascinating things about covering the economy in the sort of era of the pandemic and COVID is that, you know, all the sort of charts, all the data points that we look at, they all look kind of the same. Basically, the entire world,

all normal stopped in March 2020. Everything fell off the cliff, you know, all this emergency cash from governments. We're all staying home. Government's throwing money at the problem, trying to fix it. And then things sort of, you know, slowly methodically get better, maybe not in a health sense, but the other parts of our economy sort of, you know, climb their way up. All that money went out there and just sort of that sort of rainy day money, right? Like the money they sort of distributed out there, companies were saving their money. Banks were putting it aside way to cover bad lows that might come up in the future. For the most part, a lot of that bad news economically didn't really

happen. So the result is that all that cash sort of built up. Companies sort of cut back on their spending to make sure in case something bad happened. And if the bad didn't happen, that money just sits there waiting to do something. And it shows up every three months on a balance sheet when you release your earnings and investors are saying, well, look, you had 10 million before and then you had 20 million. Now you have 30 million and now it's 40 million why don't you maybe give me some of that 40 million dollars because clearly the worst case scenario hasn't happened so can i get some of that a windfall I'm going to go. through Angel Investment and Industry Connections. That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. talking about some people who think buybacks are just part of a healthy market. On the weekend, Berkshire Hathaway CEO and mega-billionaire investor Warren Buffett,

he made a pretty spirited defense of buybacks, saying anyone who criticizes them is either an economic illiterate or a silver-tongued demagogue. Why does he say they're a necessary part of a healthy market? I generally don't like being on the opposite end of an argument to Warren Buffett, but I will put on my sort of anti-Oracle of Omaha hat here. I mean, Warren Buffett, to his credit, doesn't engage in sort of most of the more egregious shenanigans with buybacks. He just sort of looks dispassionately at the market and says, buy things that are undervalued and sell them when they're overvalued. So if I have money here and I can't find anything else to do, it's good for everyone. It's good for the investor. If my investors make money, they'll go out, they'll spend money on houses and cars and furniture and whatever. That'll trickle down. Cracking down on buybacks is bad for the stock market, which is

generally in his worldview, bad for everyone. So along those lines, if we're going to look at buybacks in the kindest terms possible, are there legitimate reasons beyond propping up the share prices that you might want to do a buyback? Yeah, I mean, it depends on your business. A capital intensive business could probably find a better way of spending that money on, you know, building a new factory or hiring more people or whatever. Some companies that are especially thinking of'm especially thinking of the way Warren Buffett makes money is by saying, this company is undervalued. I'm going to buy it, wait for the market to realize its value, and then sell it or keep it forever. If Warren Buffett's saying, look, this asset's worth 100,

it's right there for 80. Why don't I just buy it for 80 and I can make everyone $20 right there? That's maybe fair enough. Again, I don't think it's a sustainable business model forever, but for some companies, I could see it being a fair use of the capital. And then what about the argument that buybacks aren't a productive use of money? They're not creating anything new, anything of value in the economy. So are there companies that we have seen that have been buying back stock despite otherwise struggling? In the U. the US especially, one of the biggest stock buyback companies in the pandemic were the big tech so-called failing stocks like your Facebook, Amazon, Netflix, Google, that kind of stuff. That was

all well and good for most of 2020, 2021, and 2022. I'm hard-pressed to think of a company that has, in the last 18 months or so, a a worse use of capital than than meta which is the company formerly known as facebook so you know it was late 2021 their stock had gone on a crazy run i think they may have hit a trillion dollars in value if not just shy they were you know by any metric one of the biggest most powerful companies in the world and then in in late 2021 they pivoted to this whole metaverse thing imagine you put on your glasses or headset and you're instantly in your home space. It has parts of your physical home recreated virtually. It has things that are only possible virtually.

And it has an incredibly inspiring view of whatever you find most beautiful. All of a sudden, you know, we're talking about Facebook now. It's about the future and metaverse. We're going to start spending all this money. Yeah. Tens of billion dollars on the metaverse. They're buying tens of billions of dollars worth of their own shares back, even as the value of their company starts dropping, right?

So like now they're trying to catch this falling knife where they're saying, you know, our shares are $100. We're going to buy some up. Now they're 90. We're going to keep buying, keep buying, keep buying. Even in my sort of, you know, pro investor sense, that's a waste of investor money, right? They're just saying, you know, you were worth this much. You're just spending good money after bad, trying to do these buybacks because you have to pay off your stock options for all the sort of software engineers that you headhunted from Google or whatever. And, you know, in the last few months, they're now part of these tech layoffs, right? Like they expanded too fast.

They overhired. They're laying off cutting people. So just to recap, the company's lost after value. They've spent tens of billions on buybacks, tens of billions of what looks like wasted money on the metaverse. And they're fiery people. How is that good for anyone, Warren Buffett? I guess that's what I keep coming back to is, on the one hand, when you first hear about this, you think it's just about the stock market and rich people making more money. But then when you really get into it, you are talking about these choices of how people get paid and whether there are more jobs in the economy or the jobs that already exist get to stay. Yeah, I mean, it's a values question, right? I mean, I won't sort of blame these

companies for doing buybacks because the system is set up in a way that encourages them. They have an incentive, the rules are set, that their primary concern is make the stock price go up, make profits so you can slowly and manageably build new products, build new services, and that's good for everyone. It's just these buybacks were sort of a loophole that's been sort of more and more abused over the years that now it's if you were to give some random company $100 million, they're going to say, well, it's probably not worth it to build a new factory. You know, we have this machine that spits out money. Should I sort of invest and spend my money on building a new money making machine or should i just like do these buybacks because it's really easy there's a

tax break and my investors are happy it's you know to me it's even as an investor i would say when you do that many buybacks it's basically the company admitting we literally have no other ideas like we're innovating we don't have the next great idea we're not going to be the next iphone maker we're not going to like revolutionize consumer products it's just we have this money We don't have the next great idea. We're not going to be the next iPhone maker. We're not going to revolutionize consumer products. It's just, we have this money. I don't know what to do with it. So here, take it, which is great while it lasts, but it's not a good sign for your long-term viability. Year-to-date buybacks announcements have topped $173 billion. That's according to data that was compiled by Reuters with a record January where buybacks more than tripled from a year ago in January. So this really strong start to buybacks this year in 2023.

Meta announcing a $40 billion program. BP announced a program. UPS. Well, it's great if you're the CEO that gets a bonus because of that decision, but not great for the next CEO who comes after you. Exactly. The guy that comes in to clean up the mess asks you, your company has gone from $100 billion to $50 billion. And it turns out when you look under the hood that you've spent $30 billion buying up shares that were losing value because it seemed like a good idea at the time. And Pete, I'm doing this bad thing where I'm saying the guy CEO, the guy or girl CEO who comes in after. I noticed that about myself too. Yes, the guy or girl CEO. But yes, you know, maybe in the future we can find

a female CEO who would also make the terrible decision to buy back shares. So let's talk about what's being done about this. So the Canadian federal government planning to bring in a 2% tax on share buybacks at the start of next year. And it sort of mimics a 1% buyback tax in the U.S. President Joe Biden has pledged to quadruple that to 4%. Corporations ought to do the right thing. That's why I propose we quadruple the tax on corporate stock buybacks and encourage long-term investments. What's the rationale for these taxes?

I mean, the rationale for a tax is the same as the rationale for any tax from a government, which is that A, it adds to their revenue, and B, if they can sort of pitch it right, it basically makes it seem like we're going to be taking from the red jewelry, be giving it to the poor. People love that kind of stuff. The politics plays very well, and it's sort of, you know, low-hanging fruit tax revenue-wise. Right. So then to that point, are the governments actually trying to crack down on buybacks, or are they just trying to get some money for the public purse? Cracking down to the tune of one or two percent, that seems like a bit of a misnomer to me.

If you wanted to crack down on something, you could pass a law and say, don't do it. You can do whatever you want, give the money away in dividends, do whatever you want. There used to be one in the U.S. Buybacks didn't used to happen because it was seen as a form of sort of market manipulation. in the US, buybacks didn't used to happen because it was seen as a form of sort of market manipulation. So if the SEC or the lesser extent in Canada wanted to, you know, quote unquote, crack down on this, they can say, you can't do this, they would be huge pushback. And you know, usual voices would be like claiming all to be bad for business, and we're gonna like leave town and we'll move our headquarters to a different country. They're not doing that, right? They're

just sort of they're doing literally the least least they could do because it sounds good to say, we're going to, you know, that oil company or that grocery chain or that bank that made a zillion dollars this year, we're going to make sure they pay their fair share by charging them 1% more than we did before. So this policy of a 2% tax, it's months away. So do you think we'll see a big surge in buybacks now as companies try to get their share values up before that tax kicks in? I haven't crunched the numbers on this, but I remember when this rule came out, and I think it was November last year, I wrote about it. And my memory I first thought was like, hmm, well, if you thought there were a lot of buybacks

before, there's going to be a lot more now. Because basically, it's like, we're going to make this product illegal after this date, then people are going to go stockpile it beforehand, right? You're going to sort of do whatever you can to sort of get your fix before the crackdown comes. If the average CEO has a bunch of money lying around, he definitely has an incentive to do buybacks anyway. There's probably a like clock ticking even more behind him now because he knows, you know, if I get that one time bump in the stock price, it's sort of do it now because if I do it next year, the bump will be as great. All right, Pete, thank you so much for helping us understand this and taking us through all the nuances. Hey, cool. It's always fun.

All right, that's all for today. I'm Jodi Martinson. Thank you for listening to FrontBurner.