There are two main channels for funneling profits to shareholders: dividends and stock repurchases. From 2000 to 2017, dividends and stock buybacks totaled about $10 trillion, finance professors Kathleen Kahle of the University of Arizona and René M. Stulz of Ohio State University report in a just-released working paper by the National Bureau of Economic Research. That was roughly double the amount ($5 trillion) from 1971 to 1999, a longer period.
The study compared the two periods to see what changes, if any, had occurred. (All figures were adjusted for inflation.)
There were two large shifts: First, total payouts to shareholders — dividends plus share repurchases — rose from 19 percent of operating profits in the 1971-1999 period to 32 percent in 2000-2017; and second, buybacks alone accounted for 55 percent of the distribution in the 2000-2017 period, up from 22 percent in the 1971-1999 period. To emphasize: Stock repurchases soared.
Here is where self-dealing becomes possible and, perhaps, probable. Given the increased importance of stock-based compensation packages for top executives, the bias toward stock repurchases boosts executives’ pay as well as shareholders’ cash balances.
But there’s another possible explanation for the surge in stock repurchases, note Kahle and Stulz: the “lifecycle” theory. When companies are young and growing rapidly, they have an almost-insatiable demand for investment funds to finance their operations. As they age and expand, they begin to generate sizable amounts of profits and cash. At some point, these companies may have more cash than they know how to spend.