CME Group CEO is 'not a proponent of' regulating stock buybacks

The always questionable practice of big companies spending millions to buy back their stock has suddenly become a renewed hot button political issue ahead of the 2020 election.

And voices from all sides of the aisle and Wall Street are weighing in.

Senators Chuck Schumer and Bernie Sanders recently proposed legislation in a New York Times op-ed that would put a dent in the stock buyback bonanza that has raged on for years on Wall Street. The dynamic duo’s proposal would prevent companies from buying back their own stock unless they first pay workers at least $15 an hour and offer paid time off and health benefits.

The proposal on its own is ludicrous as America is a capitalistic society. Companies are going to pay their workers what they want and offer the benefits they deem are appropriate given, among other things, their financial standing and outlook. The government is unlikely to approve a measure that would be akin to telling companies what they must do or not do on the compensation front.

After all, this isn’t Russia or China.

“I have a philosophical difference on buybacks, I think people have the ability to decide — they are public companies — what’s in the best interest of their shareholders. So, I am not a big proponent of having people legislate if they can do buybacks, or give dividends or whatever they’re going to do with their companies,” CME Group’s long-time chairman and CEO Terry Duffy told Yahoo Finance.

“I am not a supporter of that. I don’t see that type of legislation passing — I would be very surprised if it did,” added Duffy.

Buyback regulation could give CME a boost

CME Group’s bottom line theoretically could be boosted if stock buybacks are regulated in any form. If companies are in the market buying back their stock less, it could increase volatility (less liquidity in the markets, potentially) and trigger interest in CME’s risk management products.

The increased volatility could also cause a flight by investors to safer Treasuries. CME Group would win amidst that shift, too — its recent $5.5 billion acquisition of NEX Group has made the company a powerhouse in the market for trading Treasuries.

Meanwhile, former Goldman Sachs CEO Lloyd Blankfein has come out and blasted the proposal from Schumer and Sanders.

“A company used to be encouraged to return money to shareholders when it couldn't reinvest in itself for a good return. The money doesn't vanish, it gets reinvested in higher growth businesses that boost the economy and jobs. Is that bad?” Blankfein tweeted on Feb. 5.

Most Republicans agree that regulation of buybacks in the mold of Schumer’s and Sanders’s proposal is excessive. But, they aren’t in full agreement that nothing should be done to reign in buybacks and push big companies to spend more on capital investments.

“Well, I'm not on the same page. My Democratic colleagues want to make it almost impossible and want to do all sorts of things to make it difficult for a company to carry out a share buyback. I'm not asking that at all,” Republican Senator Marco Rubio told Yahoo Finance. Rubio this week said he plans to introduce a bill that would discourage stock buybacks.

The plan would attempt to eliminate differences in the way stock buybacks and dividends are treated under the tax code. Stock buybacks are currently taxed at a lower rate versus dividends.

Stock buybacks impact on market

Since 2000, stocks with higher buybacks outperformed their sector peers by 150 basis points during corrections and 200 basis points during recessions, according to research published by Bernstein earlier this year.

What well-paid executive doesn’t want their stock to outperform spurred mostly by reducing the number of shares outstanding? The short answer: not a single one.

Companies dumped about $1 trillion into stock buybacks in 2018, in many instances buying at the market top in the fall. Talk about instant value destruction.

Despite the optics of it all, UBS argues (shocker) that stock buybacks don’t have an impact on the broader market.

“There is little evidence that suggests that share buybacks crowd out funds that could be used for paying employees, funding capital investment, or other potentially more productive deployment of capital,” said UBS head of Americas equities Jeremy Zirin. “Companies pay workers market-derived wage rates and make capital investment decisions based on their estimate of the potential internal rate of return (IRR) for each project. The sluggish capital spending trends of the past several years are more likely a reflection below average final demand, economic uncertainty, and policy disincentives, not a preference by corporate managements to enrich shareholders via buybacks.”

Good luck convincing the pols on that one.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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