In an era of sluggish economic growth and short-term incentives linked to stock price performance, it perhaps comes as no surprise that many US firms are choosing to lift investor payouts rather than invest for the future.
This relationship is no better demonstrated than in the chart below, supplied by Moody’s Investor Services.
It shows shareholder compensation — dividends and company buybacks combined — as a percentage of capital spending from US non-financial firms.
As a proportion of capital expenditure, firms are increasingly choosing to pay out rather than invest for the future, with the ratio now sitting at levels far higher than prior decades.
“In response to a much diminished outlook for economic growth and the related need to stoke shareholder returns, the ratio of shareholder compensation to capital spending has jumped sharply since 2004,” said John Lonski, chief economist at Moody’s Capital Markets Research.
“During the last five years, the 10.8% average annualised growth of shareholder compensation has sped past the accompanying 6.0% growth of non-financial-corporate capital spending.”
And, he says, that divergence got a whole lot larger in the last financial year, ending June 30.
“That gap draws merely a yawn when compared to the glaring imbalance of the year-ended June 2016, when a 17.9% annual surge by shareholder compensation towered over the accompanying 0.5% uptick by capital expenditures,” he says.
In a year when investors were scrambling for yield, US firms were more than happy to oblige, helping to continue the bull market for US stocks that began at the depths of the great recession.
Lonski says that stalling capital expenditure “stems from lower than expected business sales, which is the principal driving force behind the ongoing shrinkage of operating profits”, a troubling cycle with corporate debt levels continuing to increase.
“Notwithstanding the latest contraction of profits, corporate debt continues to grow materially,” he says. “The longer debt expands while profits contract, the more problematic becomes the outlook for credit quality.”
Despite those concerns, Lonski notes that “despite the now simultaneous inflation of debt and deflation of operating income, high-yield has rallied mightily from its lows of earlier in 2016”.
That was partially fueled by a recovery in crude prices, easing concerns over the outlook for the Chinese economy and a pullback in rate hike expectations from the Fed, not only in 2016 but in the years ahead.
With global bond yields now starting to ratchet higher, it will be interesting to see whether the demand for high-yield corporate debt continues.
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