Too many stock buybacks? A debate, in Scoreboard
In an op-ed in the New York Times, Sens. Chuck Schumer and Bernie Sanders lambasted the use of stock buybacks, calling out big companies for buying their own stock while closing locations, laying off workers and keeping wages stagnant for those that remain. Regardless of one’s political affiliation, it called out some shocking numbers.
The sheer volume of share repurchases reached a record $1 trillion. The most recent numbers from the Dow Jones says it’s $1.1 trillion from September 2018 to September of 2017, up from $931 billion. Corporate America is spending more on buybacks than any other business investment.
The franchise space is spending plenty on its own shares. Denny’s put $400 million toward share repurchases since 2017, and another $25 million last year. Brinker plans to spend $300 million on shares and in the last two years, McDonald’s spent more than $16 billion on share repurchases.
And almost every publicly held franchise company has bought back shares because it’s extremely effective at sending shares higher without all the work of actually innovating. Numerous studies show it doesn’t pay off in the long term, but the quarterly sugar high is tough to avoid.
And maybe that’s OK; the asset-light franchisor should be a steward of the brand and the public stock. But as Shania Twain once said, “Dance with the one that brought you.” There’s a balance between shareholder value and franchisee value.
The industry has already seen pushback from franchisees when they are ignored. Courts have awarded big damages and costly rescissions for just not thinking ahead for the brand.
McDonald’s, for one, got pushback from franchisees around expensive remodels and digital upgrades. The company quelled dissent by paying a larger share for those remodels. Tim Horton’s is still in the midst of a franchisee dispute; they’re mad about (among other things) major cost-cutting at the store level while the company executed a $561 million share repurchase plan.
So while franchisors spend billions to make Wall Street happy, they would be wise to spend something on the innovation and support necessary to stand out on Main Street.