Mythbusters: Corporates Are Still Investing and Are Not Buying Back That Much StockMay 27, 2014
One of the most widely publicized memes of this cycle has been the complete lack of investment by companies around the world. Confidence is still fragile and companies are not investing like they used to, so the logic goes. Well, a look at the data reveals that this belief couldn’t be farther from the truth.
In the table below we aggregate cash flow data for all non-financial constituent companies in the MSCI World Index (roughly 90% of the investible global market cap at any given point in time). The ratios presented are created using the sum total statistics in USD for all non-financial companies in the Index. So, for example, CapEx as a % of operating cash flow (OCF) in the first column is derived by dividing the total CapEx for the 1270 non-financial companies (roughly $2tn) by total operating cash flow for the 1270 non-financial companies (roughly $3tn). Some brief observations are as follows:
- CapEx as a percent of operating cash flow, at roughly 65%, has been above the eight year average for two consecutive years
- CapEx as a percent of sales has been eerily steady for the past eight years and was above average in 2013
- Net share buybacks (buybacks minus issuance) as a percent of operating cash flow have held steady over the last three years at around 11% and are fully 57% less than the peak buyback year of 2007, when companies were using 20% of operating cash flow to buy back stock
- Dividends as a percent of operating cash flow have seen a steady upward climb from 20% to 23%
- Companies are in aggregate issuing debt to the tune of about 13% of operating cash flow, which is not that much different from past years
So it turns out that contrary to what everyone knows about corporate behavior, companies are not allocating cash flow that much differently than they have in the past. They are still investing and if anything have ramped up CapEx since 2012. Headlines of gigantic stock buyback programs grab everyone’s attention, but the reality is that companies were allocating a much more significant portion of operating cash flow to stock buybacks from 2006-2008 than from 2011-2013. Indeed, cumulative buybacks on a nominal basis totaled $1.3 between 2006-2008 compared to $1tn from 2011-2013.