Capital Expenditures vs Share Buybacks: How Do Investors Want Companies to Spend?

 

I recently published an article discussing an op-ed written by Chuck Schumer and Bernie Sanders where one of the ideas they put forth was to create a (undefined) mechanism to discourage corporate buybacks. Recently Marco Rubio joined in with his own version of the same theme (still scant on details, but at least he said his proposal would focus on tax policy to discourage buybacks and encourage investment). This may mean that there is a bipartisan path forward on a proposal that would discourage companies from buying back stock. The rationale is that by making buybacks less attractive, investment through capital expenditures would be the obvious alternative, especially if there was an incentive tied to such investment. And more capital expenditures are good for the economy.

While corporate buybacks have been getting attention for years, the focus was intensified in 2018 because of the increase in buybacks as a result of the corporate tax windfall. The chart below shows how abnormal the buyback levels of 2018 were. Both the absolute level of buybacks that occurred and the ratio of buybacks to dividends as a means of returning capital to investors was at an all-time high with a 30% increase in the level pf buybacks relative 2017. As a contrast, dividend payouts decreased by 6%. But this hides the fact that capital expenditures were also at record levels in 2018 and increased 16% from 2017 levels.

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One Response to “Capital Expenditures vs Share Buybacks: How Do Investors Want Companies to Spend?

  • although, in the long run, cap ex is negatively correlated with payrolls, only adding to the secular problem of low wages, low retail spending and low GDP growth. Use the money to pay people??

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