by Joan Warner
Last week my colleague Ed Cone flagged a Wall Street Journalpiece that mystified me. Reporting on Bank of America Merrill Lynch’s latest global fund manager survey, the Journalsaid these expert investors are sick of seeing companies pour cash into dividends instead of plowing it back into their businesses. But, the Journalwent on to opine, companies “may not have much of a choice.” Thanks to the global economic slowdown, there’s apparently “a dearth of investment opportunities.”
That was the part I didn’t get. What about innovation? What about R&D? U.S. companies have nearly $2 trillion in cash on their books. And few economists would disagree that the key to long-term prosperity is long-term investment—in new products and services, in talent, in technology. Surely, China and Brexit notwithstanding, companies could get more bang for all those bucks from innovation than from dividends or share buybacks.
Out of long habit, I tried fact-checking the Journalstory. Turns out the corporate investing picture isn’t exactly coloring-book material. Yes, in industries like oil and gas, capital spending has flatlined. You can hardly blame energy executives for keeping their wallets shut during a global oil supply glut and a dizzying price plunge. It’s also true, as Goldman Sachs points out, that some sectors have been overinvesting in the emerging markets during the last several years. Now, there’s too much capacity.
And Citigroup tells Bloomberg that excluding the energy sector, capital spending is forecast to rise by 9% in 2016. As for the complaint that dividends and buybacks are sucking up all the corporate cash, Citi says it’s a “myth.” In fact, capital expenditures still far outpace spending on share repurchases and dividends.
So what are the fund managers so upset about? Hopelessly confused, I turned to Oxford Economics’ head of U.S. Macro Investors Services, Kathy Bostjancic. Kathy confirmed that as a percentage of GDP, corporate investment isn’t particularly weak right now. But she agrees companies’ tendency to hoard cash is worrisome. “At the end of the day, the way companies thrive and the way living standards go up is through productivity and innovation,” she says. “So it’s a problem.”
One explanation, Kathy suggests, is that CFOs remain shell-shocked by the Great Recession. Like the generation so traumatized by the Great Depression of the 1930s that they refused ever to take on a penny of debt, today’s CFOs are simply afraid to spend money, having seen formerly healthy businesses get all but shut out of the commercial paper market in 2008–09. “They’re scarred,” says Kathy. “And investments in innovation take years to come to fruition.”
Like the fund managers, she laments the short-term thinking that keeps companies from putting all that beautiful cash to use. Kathy also understands why I’m confused. Among economists, she says, “there’s a big debate on whether we’re measuring investment and productivity correctly.” It may be that, because of technology, companies are being “more innovative and productive than we think.”
Joanie Warner is the Thought Leadership team’s Managing Editor for financial services.