As the U.S. government hands out bailouts due to the coronavirus, many companies that have announced layoffs have completed massive share buyback programs in recent years. The massive amounts of corporate debt many have piled up just to buy back shares is also complicating matters. As a result, many corporations are left unable to borrow money to support operations during this lean time because they have strained their credit.
Share buybacks and layoffs amid calls for coronavirus bailouts
The New York Times reports that top executives at KFC, Papa John's, Wendy's and other major restaurant chains called President Trump with concerns about the COVID-19 crisis. They requested coronavirus bailouts to avoid mass layoffs—even though they had conducted major share buyback programs in recent years.
These companies all posted sizable profits over the last several years, and yet, they sought help from the U.S. government because all their money was gone. Large swathes of corporate America have been buying back shares in recent years, driving the longest equity bull market in history.
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The purpose of share buybacks is generally to boost stock prices. In some cases, companies even borrowed money to be able to buy back shares and raise their stock prices, leaving them without available credit at a time when it is needed most.
The Times notes that the call for bailouts amid the coronavirus crisis to avoid mass layoffs after years of share buybacks illustrates a major failing with the strategy. Shelling out money on buybacks and dividends aligns companies' priorities with shareholders' interests.
Many high-profile investors have pressured companies to buy back their shares and pay dividends at a time when they should have been saving up for lean times ahead. Bowing under pressure to please investors and juice their stock prices, companies have focused on the desires of shareholders instead of the needs of their own business operations. As a result, they were left without cash and seeking a bailout during the coronavirus crisis.
President Trump's tax cut was aimed at boosting employment and wages, but instead, it helped drive more wealth for investors via share repurchases and dividends. Data from CapitalIQ indicates that between 2017 and 2019, S&P 500 companies spent $2 trillion buying back their own shares.
When dividend payments are included, companies in the S&P spent $3.5 trillion boosting their stock prices and enriching shareholders in those three years. That amount is equal to their collective net income for those three years, which means they could have been better prepared to support their employees during the coronavirus crisis if they hadn't done that.
S&P 500 companies don't have as much cash as they had nine years ago, based on net debt to EBITDA. A higher ratio means less cash on hand and coming in. FactSet data indicates that this ratio was at 1.8 as of March 30, which is much higher than it was the year before the 2008 financial crisis.
Share buybacks before call for coronavirus bailout
Over the last five years, American Airlines doled out $13 billion on dividends and share repurchases, while Boeing dished out almost $53 billion. As part of its coronavirus bailout package, American starts to receive up to $10.6 billion in loans and grants from the U.S. Treasury. The CARES Act, which Congress passed last month, will provide up to $17 billion to companies that are considered essential for national security, which includes Boeing.
Between 2015 and 2019, McDonald's and Yum! Brands paid shareholders dividends and share buybacks amounting to about one-third of the $145 billion the restaurant industry has requested in coronavirus bailouts, based on data from Hindenburg Research. Although the industry did not get the money it requested, it's expected that individual restaurant owners will receive bailouts.
The Times added that Yum returned $15 billion to shareholders through dividends and buybacks over the last five year, and it borrowed money to fund the cash returns. As of the end of 2019, the company's debt was more than double what its assets were worth, according to Hindenburg. In the five years before the five-year period ending in 2019, the restaurant chain held debt amounting to only 40% of its assets.
Yum didn't seek a coronavirus bailout, although a spokesperson said franchisees would be eligible to request funds. McDonald's also didn't request any funds, and it has stopped buying back shares, slashed $1 billion off its spending and borrowed more funds.
Pushback against coronavirus bailouts
While some investors like Warren Buffett have said that share buybacks are alright, Social Capital CEO Chamath Palihapitiya told CNBC that he doesn't think there should be bailouts for billionaires or buybacks during the coronavirus pandemic. He called buybacks "the primary example of a growing strain of incompetence amongst CEOs and amongst boards."
Two weeks ago, he said that poor-performing CEOs should be "wiped out" instead of bailed out of the economic downturn caused by COVID-19. He said their behavior of buying back so many shares that they don't have enough capital during the downturn is being rewarded. He said S&P 500 companies have spent more than 90 cents of every dollar of profit they made over the last 11+ years buying back stock and paying dividends.
While layoffs have numbered into the millions over the last month, he expects companies to have another massive round of layoffs in the fourth quarter after they spend the money they receive in their coronavirus bailouts.