Laurence Fink, chief executive officer of Blackrock Inc., the world’s largest money manager with more than $4 trillion in assets, recently issued a warning to U.S. companies: Stop focusing on short-term returns at the expense of longer-term investments.

“It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”

Fink made these comments in a letter to the CEOs of the companies in Standard & Poor’s 500 Index, referring to stock buybacks and dividends as a form of “short-termism.”

What were the longer-term investments he suggested? “Innovation and product enhancements, capital and plant equipment, employee development, and internal controls and technology.” I find it hard to disagree with him.

Stock buybacks and cash dividends totaled $214.4 billion in the fourth quarter of 2013. That is the highest level since the record high of $233.2 billion in the final quarter of 2007, according to the Wall Street Journal. Compare that to the second quarter of 2009, when buybacks and dividends totaled a mere $71.8 billion.

Buybacks tend to boost per-share earnings as corporate net income is applied to a smaller base of stock outstanding. Higher earnings per share can justify an increased stock price. In an era of low bond yields, dividends are an income stream that also gives the investor potential capital appreciation.

Both of these forms of financial engineering have helped to drive U.S. equity prices higher. However, unless a company wants to go private, it can’t buy back its stock forever. Dividends are limited by a company’s earnings.

Companies only have a finite amount of cash to invest. Whatever gets spent on buybacks and dividends is that much less available to be spent on investments in employees, research and development, and capital expenditure. It’s basic arithmetic.

When will the next round of capital investment begin in earnest? As soon as you figure out the answer to that question, you will have gained significant insight into the direction of the economy as well as the next phase of this stock-market rally.


Originally published here


Category: Buybacks, Corporate Management, Dividends, Investing

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4 Responses to “What Will Trigger the Next Stock-Market Rally?”

  1. DeDude says:

    Leadership of most corporations are control frauds. They have nothing wested in the long-term performance of the company, and a lot in its short-term apparent performance. Most of the time the CEO has indirectly appointed a majority of the board and/or have his own short-term interests aligned with those of the activist share holders. Most of the long-term investors are institutional and don’t try to assert power and protect their interests (some are lazy because its other peoples money, others just love all the perks of being on good terms with the CEOs).

    • willid3 says:

      you mean they were suppose to be working for the corporation? not share holders? and that funds who use others money to get face time with CEO really is suppose to be working for those whose money they have? really???

  2. 4whatitsworth says:

    I think we stay flat until we see public companies binge on acquisitions again. At this point the bean counters currently in charge would need to work so I don’t see this happening until we see some stock price/bonus pain.

  3. Markethostage says:

    We need to look at root cause here. Why are CEO’s and boards approving these actions. Simple. Take a look at what Carl is trying to do with Apple. My hedge fund owns X amount of your stock. If you don’t spin out the billions in cash so I can improve the performance of my Hedge Fund I’ll raid your board and the next CEO will. The concentration of wealth is out of control. The Fed and QE continue to feed the monster. The concentration of wealth feeds the lobbying machine which in turn controls Congress hence every reform of substance is blocked or watered down. And the music continues…..