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Financial services provider reports that short term financial engineering increases short term stock prices

 

Source: The Wall Street Journal | CFO Journal, June 2, 2015 article

THE WALL STREET JOURNAL   |

 THE CFO REPORT


CFO Journal


2:54 pm ET
Jun 2, 2015

Capital   

Citi Report: Market Rewards Shareholder Returns Over Capex

 

By Vipal Monga

Activist investors like Carl Icahn are prodding companies to spend more on buybacks than on capital investments.

―Victor J. Blue/Bloomberg News

The market is favoring corporations that return more of their cash to shareholders than what they invest in capital, according to a report from Citigroup.

Industry sectors such as consumer staples, healthcare and information technology, where companies  generally spent more on buybacks and dividends than they did on capital investments, had better total returns and higher market valuations between 2010-2014, said the report from Citi’s research unit. Those sectors did better than ones where companies had to emphasize capital investments, such as energy and utilities.

“The message to CEOs is simple – if you want a higher [price-to-earnings multiple] and a rising share price, then pay out more and invest less,” wrote Citi’s analysts. “Those CEOs who ignore this message leave themselves vulnerable to activist shareholders.”

Partly in response to activist pressures, corporations in the U.S. have been slashing long-term spending and returning billions of dollars to shareholders, as The Wall Street Journal reported last week.

Companies such as Apple Inc., and DuPont Co. have shovelled cash to shareholders after being approached by activists. But not all had need that prod. General Electric Co., for example, announced a $50 billion buyback without any pressure.

Even U.S. Steel Corp., which isn’t buying back stock, has tried to anticipate activist concerns by raising the hurdles that new capital projects must clear before the company put its [sic] in them.

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