Goldman sees attacks on corporate buybacks going nowhere, for now

With lawmakers poised to step up scrutiny on corporate buybacks this week, Goldman Sachs has a message for anyone concerned US companies are about to lose their preferred channel for returning cash: It’s too early to worry.
“Politicians on both sides of the aisle have expressed support for measures aimed at curtailing share repurchases,” Goldman strategists led by David Kostin wrote in a note dated March 22.
But, investors should “discount the headlines by the likelihood that these proposals become law and the time it would take for such laws to be written and passed,” they said. The perspective comes as Democratic senators are set to weigh in on buybacks at a hearing.
Tammy Baldwin, Debbie Stabenow, Chuck Schumer and others plan to discuss “reining in corporate stock buybacks and giving workers a voice on corporate boards,” Baldwin’s press office said in a statement.
Voices against buybacks are getting louder as politicians focus on corporate governance as an election issue. Republican Marco Rubio, several Democratic senators and presidential candidate Bernie Sanders have lashed out at buybacks and proposed related legislation. Last month, Schumer and Sanders penned a New York Times opinion piece about limiting buybacks.
Stock repurchases have gained traction in recent years, with corporate appetite dwarfing all other investors as the biggest source of demand for US stocks. Net purchases from Corps totalled $1.6tn during the past three years while investors from pensions to mutual funds to individuals were sellers, according to data from Goldman Sachs.
Since there are no specific policy proposals, it’s hard to quantify how potential legislation might affect share repurchases or how companies might redirect cash toward other uses, according to Goldman. In the long run, however, any restrictions on buybacks would mean higher dividends and lower debt, the strategists said.
“The most obvious substitute for buybacks is dividends,” Kostin said, noting that spending has recently shifted toward share repurchases. “A restriction on buyback activity would likely shift the pendulum back towards dividends.” Buying stocks with the fastest dividend growth is one of the firm’s top recommendations in 2019. But the trade has failed to deliver as a Goldman basket of such stocks has performed in line with the S&P 500.
Any clampdown on buybacks would boost the allure of the dividend trade, Kostin said. Right now, the dividend swap market implied just a growth rate of 2.5% a year in payouts during the next decade, trailing Goldman’s estimate of 3.6%.
“We believe long-dated S&P 500 dividends are currently underpriced and any restrictions on buybacks would only increase their attractiveness,” Kostin wrote.