Posts filed under “Investing”
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.
The endless chatter of bubbles and crashes continues unabated. Eventually, all bull markets come to an end, and this one must eventually as well. But as I sit down to write this, the Standard & Poor’s 500 Index yesterday hit yet another all-time high. U.S. markets continue to have good internals, strong breadth and broad…Read More
How to know whether stocks are cheap or pricey Barry Ritholtz Washington PostTerms March 23, 2014 Last week, the Fed shared some widely expected news: It will taper more — keeping up a policy of slowly reducing its bond-buying program with the goal to wind it down by year’s end. It has telegraphed…Read More
The Dow Jones’s 22,000 Point Mistake Bryan Taylor, Ph.D., Chief Economist, Global Financial Data One of the long-term components of the Dow Jones Industrial Average has been IBM. The company was originally added to the Dow Jones Industrials on March 26, 1932 in a reshuffle involving eight stocks including Coca-Cola, Nash Motors (later American Motors)…Read More
Those almost 10,000 early investors on Kickstarter participated in one of history’s most lucrative funding rounds from the perspective of the people receiving the funding: a $2.4 million early-stage investment in what would become a $2 billion business in a year and a half, in return for 0.0% equity.” – WSJ’s Corporate Intelligence on…Read More
> My Sunday Washington Post Business Section column is out. This morning, we look at whether stocks are cheap or expensive. The print version had the full headline Are Stocks Cheap or Not? How to Tell. The conclusion is surprisngly middle of the road. Here’s an excerpt from the column: “To know whether stocks…Read More
Late last year, we had a wholesaler from a major ETF firm in our office. At the time, the chatter was all about the upcoming Alibaba IPO. It was going to be (in his words) “huge, disruptive, incredibly powerful – and you cannot get any.” Never mind that IPO returns are on average mediocre or…Read More