Combined stock repurchases by U.S. public companies have reached record levels, a Reuters analysis finds, but as the recent history of such iconic businesses as Hewlett-Packard and IBM suggests, showering cash on shareholders may exact a long-term toll. ... A Reuters analysis shows that many companies are barreling down the same road, spending on share repurchases at a far faster pace than they are investing in long-term growth through research and development and other forms of capital spending. ... Almost 60 percent of the 3,297 publicly traded non-financial U.S. companies Reuters examined have bought back their shares since 2010. In fiscal 2014, spending on buybacks and dividends surpassed the companies’ combined net income for the first time outside of a recessionary period, and continued to climb for the 613 companies that have already reported for fiscal 2015. ... In the most recent reporting year, share purchases reached a record $520 billion. Throw in the most recent year’s $365 billion in dividends, and the total amount returned to shareholders reaches $885 billion, more than the companies’ combined net income of $847 billion. ... Among the 1,900 companies that have repurchased their shares since 2010, buybacks and dividends amounted to 113 percent of their capital spending, compared with 60 percent in 2000 and 38 percent in 1990. ... For decades, the computer hardware, software and services company has linked executive pay in part to earnings per share, a metric that can be manipulated by share repurchases.
Capital allocation is a senior management team’s most fundamental responsibility. The problem is that many CEOs don’t know how to allocate capital effectively. The objective of capital allocation is to build long-term value per share. ... Capital allocation is always important but is especially pertinent today because return on invested capital is high , growth is modest , and corporate balance sheets in the U.S. have substantial cash. ... Internal financing represented almost 90 percent of the source of total capital for U.S. companies from 1980-2013. ... M&A, capital expenditures, and R&D are the largest uses of capital for operations , and companies now spend more on buybacks than dividends. ... This report discusses each use of capital, shows how to analyze that use, reviews the academic findings, and offers a near-term outlook. ... We provide a framework for assessing a company’s capital allocation skills, which includes examining past behaviors, understanding incentives, and considering the five principles of capital allocation.
Five Principles of Capital Allocation:
1. Zero - based capital allocation
2. Fund strategies, not projects
3. No capital rationing
4. Zero tolerance for bad growth
5. Know the value of assets, and be ready to take action to create value