reporting and analysis for corporate-finance executives.
Citi Report: Market Rewards Shareholder
Returns Over Capex
Activist investors like Carl
Icahn are prodding companies to spend more on buybacks than on capital
The market is favoring corporations that return more of their cash to
shareholders than what they invest in capital, according to a report from
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
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
General Electric Co., for example,
announced a $50
billion buyback without any pressure.
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