A fundamental problem that has plagued the U.S. economy in recent years is the fact that public companies are spending and borrowing for stock buybacks and are not investing in their businesses. In fact, by preferring to spend their money on stock buybacks as opposed to capital expenditures (like property, plants, and equipment), companies are showing a total lack of faith in the U.S. economy.
Just look at these numbers…
In its “2015 Capital Spending Report,” the U.S. Census Bureau reported that between 2009 and 2013, businesses in the U.S. economy spent $397.5 billion on capital expenditures. (Source: U.S. Census Bureau, last accessed September 2, 2015.) That amounts to about $100 billion each year. (Capital expenditure figures for 2014 aren’t out yet.)
On the other hand, we have the S&P 500 companies spending about $500 billion in 2013 and another $560 billion in 2014 to buy back their shares. (Source: FactSet, March 17, 2015.) Yes, companies are spending five times the amount on stock buybacks than they invest in their businesses (capital expenditures)!
And it doesn’t stop there. According to Birinyi Associates Inc., a money management and research firm, so far in 2015, American companies have announced $1.2 trillion worth of stock buybacks! This is higher than the record amount of $863 billion announced in 2007 and 2015 is still far from over! (Source: The Wall Street Journal, May 7, 2015.)
Why I Remain Skeptical About the U.S. Economy
This is not the first time I am reporting on the negativity surrounding share buybacks.
I’m upset about them because they don’t create value. They just take stock off the market so public companies can boost per-share earnings and support their stock prices. I believe years from now, economists will look back on this era and see that corporate executives were robbing their shareholders of growth by spending money on stock buybacks as opposed to growing their businesses.
And thanks to the low interest rate environment that has not prevailed for years, companies are borrowing money to buy back their shares—something that is doing nothing for the economy.
The bottom line is until companies start to spend money on expanding their businesses—thus creating jobs—we will continue to experience anemic growth in the U.S. economy.