Cash for Buybacks Is Causing Traditional Corporate Investments to Wane

Instead of deploying their cash in ways that innovate and benefit companies’ long-term future, many business leaders, including those from DuPont, Apple, GM and others, are returning billions of dollars to shareholders, responding not only to the saber rattling of activist investors, but also to the fact that the continuation of rock-bottom interest rates has made it inexpensive to borrow to buy back shares, an action that can, in turn, boost a company’s stock price.

“At 2014 year-end, the dollar volume of stock buybacks had soared by 287% since the low after the 2008 financial crisis, and the value of M&A was up by 179%.”

According to Strategas, at 2014 year-end, the dollar volume of stock buybacks had soared by 287% from its low point after the 2008 financial crisis, and the value of mergers and acquisitions was up by 179%.

Why the hesitation to invest in the company’s future growth? “Many appear to have their doubts that ‘slow and steady’” economic recovery in the U.S. will be enough to fuel recovery at the corporate level, regardless of their individual expectations of the economy,” CFO Magazine said about the results from its latest quarterly survey of executives with Duke University.

CFO says that business leaders’ hesitance to invest their cash in prospects for company and economic growth have been “a perfectly rational market response to the sheer weight of the Obama regulatory apparatus that punishes innovation and risk-taking.”

They may be taking their protective stance too far, however. Business leaders need to be careful about undermining traditional investments such as spending on research and development. R&D was flat in 2013, according to Battelle and R&D Magazine.

To help insulate public companies from outside pressures, venture capitalist Marc Andreessen suggested at a recent Fortune magazine conference that startups mimic companies such as Facebook and Google by granting founders special types of stock that give them control over key decisions, the Journal said.

With companies’ appetites for buybacks and mergers, and the U.S. economy seeming to pull in its horns again very recently, CEOs and business owners can be expected to pursue this general course for the foreseeable future.

 

Dale Buss
Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other top-flight business publications. He lives in Michigan.

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