With lush profits and record cash balances to spend over the past several years, big companies have mostly looked for a place to spend it in the mirror. They have bought back their own shares aggressively and raised dividends, but have been reluctant to invest boldly in new projects, hiring or acquisitions.
Will 2014 finally be the year when crisis-chastened corporate executives pivot toward growth priorities and deploy their cash in capital investments, headcount and deals?
Incrementally, this seems likely. But, as Lauren Lyster and I discuss in the attached video, there are few strong indications that such a pickup in business investment from sub-par levels will qualify as a real capital-spending boom that, in itself, will propel an acceleration in the economy or the pace of job growth.
As Bloomberg News notes, corporate capital spending should reach a new record above last year’s $2 trillion level, with leading companies such as Ford Motor Co. (F) and Microsoft Corp. (MSFT) shovel cash toward plants and data centers in a bid to capture more global market share.
Yet in aggregate, corporate spending is really just catching up to profit levels that have set records for three straight years. As Bloomberg notes, the projected 2014 spending on corporate physical assets would only represent 12% of U.S. gross domestic product, down from 13% in the years just before the 2008 financial crisis. Much of this investment is expected simply to replace outdated equipment or further enhance productivity and preserve fat corporate profit margins.
The fact is, the current generation of CEOs has been rewarded nicely for redirecting profits into share buybacks and dividends, a key support for stock indexes stretching to all-time highs. A record 86% of the companies in the Standard & Poor’s 500 Index bought back stock in the 12 months through Sept. 30, soaking up $448 billion worth of shares, a level only exceeded in 2007.
The slow return of risk appetites in the boardroom has mirrored the fitful global economic recovery since 2009, during which some crisis aftershock always seemed imminent – or at least, could always be made to seem likely in order to justify a conservative stance.
Despite a full year in which no macro shocks landed, with the Washington fiscal friction acting as only a modest drag on growth, companies were unusually reserved in seeking out mergers and acquisitions.
Thomson Reuters Deal Intelligence reports that the total value of global M&A last year amounted to just 3.3% of global GDP – the lowest percentage since 1995. Similarly, the contrast between soaring stock values and a becalmed deal environment was highly unusual, as rich stock prices historically have turned CEOs’ attention to “buying growth” and expanding their empires.
This pattern will almost certainly revert toward the long-term trend over the course of the year, with M&A returning to favor as a competitive tactic. It would make a lot of sense for the combination of elevated share prices, generous debt markets (with rates at least feared to begin rising) and a hunt for new growth sources at a mature point of the profit cycle to produce freer spending companies.
Which is not the same as saying the hunt for efficiency and tight cost structures is about to end. American businesses are perpetual “restructurers” now, as Macy’s Inc. (M) showed this week in announcing 2,500 staffers would be shed and five stores closed. Widely viewed as the lean leader in its sector, Macy’s nonetheless sees more fat to trim.
This is not a new phenomenon. In the ‘90s, as many startups raised massive amounts of capital to build the Web and the wireless infrastructure, mature companies were in constant cost-cutting mode. This can be beneficial for the long-term health of businesses, but not necessarily a boon to near-term growth.
One issue is that capacity utilization of industrial facilities is not particularly high, implying some remaining slack in the system that makes heavy new capex less urgent. And when companies invest for growth now, they often do so by purchasing relatively cheap, labor-saving technology rather than big, expensive, lasting machines and buildings.
Adam Parker, market strategist at Morgan Stanley, has been skeptical that companies are particularly eager to spend heavily on new capital projects. He expects them to favor software purchases over hardware - so they can do more, but with less labor and capital.