Stock Buybacks, Dividends, and Government Stakes in Companies Receiving Grants

Recently there has been criticism by elected officials and others of company policies of buying back their stock and paying cash dividends, especially in the current environment of the public health crisis faced by this country and the rest of the world.

Former Federal Reserve Chairman Ben Bernanke was interviewed today at Brookings and addressed these and other issues. He stated that, in general, stock buybacks and dividends are good as capital not needed in one sector of the economy (or company) is returned to shareholders who then reinvest or reallocate this capital to other sectors (or companies) where it is needed. Thus, excess cash that cannot profitably be invested by one company is reinvested elsewhere in the economy.

With respect to the issue of whether the government should receive equity stakes in companies such as airlines that receive grants to help them recover from the virtual shutdown resulting from the coronavirus, Bernanke responded that there is a delicate balance between enabling these companies to survive in the future and allowing taxpayers to earn a return on these grants. Equity stakes could take the form of warrants that would be convertible into the common stock of the company receiving the grant.