Last week the Financial Times ran an article on the amount of cash that has been stockpiled by US companies, which have then focused on returning that cash to shareholders, rather than reinvesting it directly back into the business. S&P estimates that between the last quarter of 2013 and the first quarter of 2014, US corporates bought back over $250bn of their own shares.
Share buy-backs are considered part of the cash-return to shareholders, which to our view is a tad misleading; the cash is not physically returned to a shareholder, no one receives a cheque in the post. Before a company can buy back its own shares the directors ask permission from the shareholders, usually at the annual general meeting.
CEOs like share buy-backs. By reducing the number of shares in issue, valuation matrix like earnings per share and return on equity are improved, measures by which the board are often remunerated on. It does not, as the FT points out, contribute in any way to the growth of the company.
Merrill Lynch recently produced a piece of research to suggest that despite the continued attention on share buy-backs, fund managers are now asking for greater focus on capital investment. In the survey 57% of those fund managers questioned want to see increased capital investment, 11% want to see balance sheet improvement and the rest are looking for share buy-backs.
One possible consequence of the increased focus on share buy-backs is highlighted in the Merrill Lynch research report. The report points out that the balance sheet age of structures is the highest it’s been since 1964, the age of equipment the highest since 1995, and the age of intellectual property highest since 1983. Overall the age of corporate assets, which is currently at 15.9 years, is the highest it has been since 1965. The only time in the last 90 years that this figure has been higher appears to be the era post the Second World War.
Being a CEO of a multinational company is only slightly less precarious these days than being the manager of a premier league football team. Ultimately, share buy-backs are another example how CEOs are taking a shorter view, rather than looking to invest for the longer term. Investment fund managers, who are also under pressure to perform in a shorter time scale, in turn have often driven this.