“Sluggish activity will spur firms to repurchase shares in an effort to boost EPS growth”
– Goldman Sachs
Back in April 2012, we predicted that the Fed’s “visible hand hand is forcing corporate cash mismanagement”, stating explicitly that the Fed’s ZIRP and QE, “is now bleeding not only the middle class dry, but is forcing companies to reallocate cash in ways that benefit corporate shareholders at the present, at the expense of investing prudently for growth 2 or 3 years down the road.”
It is now three years later, and according to the latest Factset snapshot, revenue growth in Q3 is set to decline 3.7% from a year ago a quarter where corporate earnings are poised for their first recession since 2009. As we predicted, companies not only did not invest sufficiently in capex, R&D and other forms of organic, and thus revenue growth, but instead unleashed the biggest shareholder-friendly tsunami in history, with record buybacks, M&A, and dividends in the years following.
Sure enough, as can be seen in the chart below, after spending 55% of total cash proceeds on organic growth in 2009 (capex and R&D), since then shareholder-friendly strategies have taken over again, and Goldman now expects that organic growth will account for only 40% of total cash spend, with Buybacks, Dividends and Cash Acquisitions accounting for 60% of total use of cash proceeds.
Furthermore, according to the latest forecast by Goldman’s David Kostin, this surge in buybacks will continue for the simple reason that with Capex spending set for its first decline since 2009 (mostly due to the commodity crunch forcing countless energy companies to put capital expansion on indefinite hiatus), investors will have nothing else to reward, so may as well forego even more future revenue growth and demand an immediate cash out right here, right now.
From Goldman:
Managements will remain committed to returning cash S&P 500 firms will return more than $1 trillion to shareholders in 2016 with buybacks and dividends each growing by 7%. We expect high cash return strategies to outperform given modest GDP growth, low rates, and slim equity returns. A similar macro environment in 2015 rewarded stocks with high cash returns to shareholders while firms investing in capex lagged.
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