On Monday, Howard Schultz opened his latest tenure at Starbucks by snubbing his nose at one of Wall Street’s most popular strategies: The share buyback.
In ditching the company’s share repurchase program, Schultz hoped to set a different tone for his tenure. This would not be a company playing by Wall Street’s rules but by Main Street. Shareholders would not be the company’s primary stakeholder. Instead, Starbucks would work to make life better for its workers.
The statement was a clear response to a growing unionization effort under way at nearly 200 Starbucks locations around the country—an effort that has diminished the company’s reputation as an employee-friendly company.
Yet Schultz’s move was remarkably contrarian for the chief executive of a major public company in 2022. For all the criticism heaped on share buybacks, they remain as popular as ever on Wall Street. And Starbucks’ move was not popular. Its stock fell 5% Monday.
Share buybacks hit record levels in 2021, just a year removed from a pandemic. Companies on the S&P 500 bought a record $234.6 billion in their own stocks in the third quarter last year, according to S&P Global. That rate was only expected to continue into this year.
Companies largely halted share buybacks in 2020, opting to preserve their cash. But they’ve clearly restarted, picking up their pre-pandemic pace. The amount of stock buybacks has tripled over the past decade.
The restaurant industry in particular is a heavy user of share buybacks as a method of returning cash to shareholders. A number of companies have either restarted buying their own shares or they’ve recently increased their share repurchase authorizations. Wendy’s, for instance, increased its share repurchase plan by $150 million this month.
Cracker Barrel last year authorized a $100 million share buyback. It had shied away from such strategies for years, preferring dividends, in part because of the presence of major activist investor Sardar Biglari.
Many other companies, like McDonald’s and Dine Brands Global, restarted share repurchases.
Starbucks has had various share repurchase programs over the years. It authorized a three-year, $20 billion program to buy back shares and pay out dividends in October. Two-thirds of that $20 billion was expected to be in the form of share repurchases.
Share buybacks are an important part of corporate strategies to return cash to shareholders along with dividends. In a dividend, companies pay out a portion of earnings to their shareholders. Share buybacks in general use company funds to purchase shares on the open market.
Companies use buybacks when their share price has fallen to levels where executives consider them to be undervalued. The repurchases can bolster a stock. They also improve the look of earnings by reducing the number of shares used to calculate earnings per share, on which many stocks trade. There are also tax advantages to buying back shares.
Share repurchases are heavily criticized, especially coming so soon after many companies received breaks to get through the pandemic. And they can become problematic, especially if companies use debt to fund the share repurchases.
They’ve also been criticized as damaging for the economy, because if companies use their excess cash to simply buy back shares on the open market, they are spending less on research and development or other business-building activities.
By doing away with the share repurchase program, Schultz is opting to focus Starbucks’ spending on its employees and its stores, which could mean increases in pay, equipment upgrades, improved technology or other investments designed to improve the employee experience. Perhaps more to the point: He will be viewed as counteracting a shareholders-above-all view of corporate leadership.
Christopher Carril, analyst with RBC Capital Markets, said in a note Monday that Schultz’s move “an important, symbolic first step toward addressing employee concerns.”
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