Preventing Stock Buy Backs—A Bad Idea

In yesterday’s daily press briefing, Trump said his administration would figure out how to prevent any corporate bailout money being used to buy back stock. The country is facing many problems right now. Spending time and effort in these times on a non-problem is a bad idea.

Companies buy back their stock when they have more cash on hand than they have ideas, skills, or capacities to produce things people need or want. If those companies keep such excess money, the money won’t be used to provide goods or services people want or need. Idle cash helps no one. Money put to productive use helps everyone.

If a company buys back its stock, the stockholders who receive the money will use most or all of the part of the money (leftover after capital gains taxes are paid) to invest in companies that have good ideas as to how to make stuff people need or want.

Consequently, whether or not the bailout money is used to buy stock, that money will be invested in making new or more stuff people want or need. Workers and consumers win no matter which company profitably invests the money. Idle cash in companies with insufficient ideas as to how to deploy it effectively prevents the money from being put to better uses.

The bailouts of corporations will be either a good idea or a bad idea independent of what any individual corporation does with the money.

Another relevant observation is that few companies reject the corporate finance theory of an “optimal debt/equity ratio.” A rule of thumb is: “The optimal D/T ratio varies by industry, but it should not be above a level of 2.0” (i.e., company debt should not exceed twice the value of its stock).

So, almost all companies have debt. Given how much the value of corporate stocks have fallen recently, most companies have an unusually, probably dangerously, high debt ratio (the higher the debt/equity ratio is, the greater the risk of going out of business. Given how much riskier doing business is now than it was two months ago, the best use of some or all of any bailout money could be paying off debt to stay in business (rather than buying back stock or being thrown into bankruptcy).

Concerning companies that do not have too much debt right now, if Trump precludes companies from buying back stock with bailout money, nothing would prevent them from paying off debt.

The worst alternative would be for Trump to disallow the use of bailout money either to buy back stock or to pay off debt. In that case, the funds would be far less likely to be put to productive use.

The idea that the government dictating how companies use their resources will either work or is a good idea is a bad idea.

The fact that leftists are in constant fear that someone somewhere might be making a profit is making the adoption of sound economic policies harder. That the general public thinks it knows more than it does about corporate finance or how a company can increase its chances of continuing to provide jobs and to serve the wants and needs of the people isn’t helping either.

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