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Stock Buybacks and Dividends; General Industries vs the Oil & Gas Sector

General Industries

Companies rely on investment by individuals and institutions (e.g., pension funds) to finance their operations and grow. These individuals and institutions expect a return on their money.

Companies must invest their profits to grow – by expanding business lines, investing in research and development (R&D), and attracting and retaining talent. At some point companies may run out of opportunities with growth potential to justify deploying profits. In such cases, they often return money to shareholders via buybacks or dividends.

Federal Reserve data show that a majority of U.S. households have direct or indirect ownership of stock via pensions, 401(k)s, or investment accounts, all of which benefit from dividends and higher stock prices. Seniors are among the biggest beneficiaries, with over half their income is from dividends, 401(k)s, pensions, other investments, according to IRS data.

Money returned to shareholders via buybacks and dividends does not disappear from the economy. This money is often redeployed as loans to companies that are hiring and growing, is used for seed money for startups, or is used for financing for emerging technologies. Stock buybacks are a sign of strength – not weakness – of the U.S. economy. Buybacks and dividends do not displace investments that firms make to grow and innovate. In 2018,

when buybacks and dividends were up significantly, U.S. business investment among also grew at the fastest rate since 2011, with companies investing nearly $3 trillion total, including $460 billion in R&D. Data show that S&P 500 companies doing buybacks during 2018 tended to do more investment and R&D than companies electing not to do buybacks, according to Business Roundtable analysis of SEC filings of S&P 500 companies.

Oil & Gas Sector

The oil and natural gas industry is one of the world’s largest and most capital-intensive industries. It has to be to effectively compete for global energy resources. The industry’s earnings make possible the huge investments necessary to help ensure America’s energy security. The earnings allow companies to reinvest in the facilities, infrastructure and new technologies that keep America going strong well into the future while generating returns that meet shareholder expectations. To understand the oil and natural gas industry one must recognize it as an industry characterized by long lead times, huge capital requirements and returns realized only decades later in the face of very real investment risks.

The oil and natural gas industry is probably one of the world’s largest industries. Its revenues are large, but so are its costs of providing consumers with the energy they need. Among those are the cost of finding and producing oil and natural gas and the costs of refining, distributing and marketing it. Planning and investment cannot be turned on and off like a spigot, without entailing huge, potentially non-recoverable costs and delaying urgently needed projects. Because the industry must plan and operate under these long lead times, it is hypersensitive to minimizing risk over the course of its investments. It is crucial for an industry that must manage such huge risks that government provide an energy policy and tax framework that encourages investment, rather than discourages it. The oil and natural gas industry is very capital intensive and devotes the largest share of its earnings to add new property, plant and equipment to its upstream and downstream operations.

It is the responsibility of company officials to build value for shareholders; one way to do this is through stock repurchases When companies repurchase stock, they are supporting the equity value of the company. This in turn helps the owners of the companies – retirees, future retirees and millions of Americans who have invested their hard-earned savings on the expectation of a reasonable return on their investment.

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