Friday, January 27, 2017

Buybacks vs. Capex

The below chart shows that through the end of 2015, S&P 500 companies were contributing a similar percentage of revenue to capex as they were back in 1995 (6.495% in 2015 vs. 6.5% in 1995). This same percentage capex contribution, however, is now only covering 113.4% of depreciation, when it covered 132.73% at the end of 1995.

[Note: going back to 1980 or 1990 shows that companies are clearly investing significantly less in capex since then, but for the purposes of this post it was sufficient to show that it is relatively unchanged in the past twenty years.] 

Amidst all of the worries about excessive share repurchases, companies have managed to reinvest the same portion of revenue. The difference is not that companies are investing less, but that a larger percentage of this capex is required as effectively maintenance capex. This is due, in part, to the divergence in the growth rates of Depreciation and Revenue that began at the end of 2012 (as seen below). This was initially offset by an increased reinvestment rate in 2014.

This is not to say that buybacks and dividends have not increased in recent years, but the increase does not appear to have come at the expense of reinvestment. Rather, much of it seems to have come from new debt issuance, but we do not necessarily view this as a bad thing. The below chart demonstrates that while Total Debt for S&P 500 companies has easily surpassed the previous 2008 peak, Net Debt is still well below the peak and Interest Expense is even lower.

Companies have taken advantage of cheap debt and large cash balances (much of which may be repatriated under new administration), they have not sacrificed reinvestment.

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