Stock buybacks are under attack — but they really may just be misunderstood, Union Pacific CEO Lance Fritz suggested on Wednesday.
“I worry that the general public doesn’t understand what happens to cash when it’s generated by a large corporation like us,” he said in an interview with CNBC’s “Closing Bell.”
A number of things happen with that money — and the most important is to make sure that the business is healthy, Fritz said. “The first thing we do with it is pay wages. We buy stuff. We make sure we’ve got the right capital structure in place. We make sure we are investing in the railroad. That’s the vast majority of the use of our cash.”
It’s only after those things are met that Union Pacific gives money back to shareholders — first in the form of dividends.
“When there is cash left over, we buy shares because our shareholders also like the tax-efficient method of returning dollars to them,” Fritz said. “We do all of that, and we’ll continue to do all of that.”
The practice of companies buying back their shares has come under fire recently. The latest salvo came on Wednesday when Sen. Chris Van Hollen, D-Md., said he wants to look into barring corporate insiders from selling stock within a certain time period.
But he’s certainly not the only one. Earlier this year, Sens. Charles Schumer, a Democrat from New York, and Bernie Sanders, a Vermont independent who is running for president on the Democratic ticket, unveiled a proposal that would force companies engaging in buybacks to pay a living wage and provide health-care benefits. Shortly after, Sen. Marco Rubio, R-Fla., said he wanted to change tax laws that reward buybacks.
— CNBC’s Jeff Cox contributed to this report.