A recovery in the global corporate capital expenditure (capex) cycle is some way
off, according to a June 2014 report published by Standard&Poor's Ratings Services.
Despite healthy corporate balance sheets, global capex spending fell by 1% in
real terms in 2013. Current estimates suggest a similar decline is likely in
2014 and early indications for 2015 are even more pessimistic.
This 2014 estimate, based on first half data, means global capex will be
stuck at the $3.3tn mark for the third consecutive year, with no growth in
sight. "A recovery in capex remains one of the most keenly anticipated trends in
the global economy," said Gareth Williams, corporate sector economist at
Standard & Poor's in London.
The forecast tracks 2,000 global companies that had gross cash of $4.5tn in
Aggressive cuts to capital expenditure are being implemented by metals and
mining companies. The analysis suggests that the downward pressure here
will be sustained for the next few years and risks spreading to the oil and gas
sector where a decade-long capex boom is
running out of cashflow headroom. "This has huge significance for the capex
outlook given that these industries together accounted for 42% of global
corporate capex in 2013."
S&P said that emerging market capex is showing a case of serious indigestion.
Spending fell by 4% in real terms in 2013 and looks set for a similar decline in
2014. The decline is broad-based and has affected corporates in Brazil, Russia,
India and, surprisingly, China.
This marks the first significant reversal in the long-term uptrend since the
various emerging market crises of the 1990s and leaves global capex growth
reliant for now on slow-growing developed markets.
S&P says expected cutbacks in European spending from key companies like Royal Dutch
Shell and Total imply a negative contribution from energy in 2014. Better news
comes from autos and telecoms, including Volkswagen, Daimler and Vodafone. Even
so, overall growth is likely to be a mere 1% in real terms in 2014.
Michael J. Mauboussin and Dan Callahan at
Credit Suisse said this month that while US companies are failing to invest in the future,
R&D (research and development) spending has remained strong while capital
expenditures although lower than during the 1980s and 1990s, in 2013 reached the
highest levels since 2001.
The analysts say:
"In the past 30 years, capital expenditures are
down, and R&D is up, as a percentage of sales. This reflects a shift in the
underlying US economy. M&A is the largest use of capital but follows the stock
market closely. More deals happen when the stock market is up.
Capital expenditures went from roughly 10% of sales to approximately 6% over the period 1980-2013. "The simplest explanation is that the
composition of the economy has changed, with businesses that require less
capital investment replacing those that require more. For
example, the energy, materials, and industrial sectors represented 50% of
the market capitalization of the top 1,500 companies in the U.S. market in 1980
but just 25% in 2013. During the same time, the healthcare and technology
sectors went from 17 to 30% of the market capitalization. This shift also
helps explain the increase in cash holdings.11 Another
possible cause of the dip in capital expenditures is that public companies are
now investing too little. Academic research suggests that public companies
invest less than comparable private companies because they want to maximize
The amount companies have spent on buybacks has exceeded dividends for the
past decade, except for 2009. Buybacks did not become relevant in the U.S. until
1982, so you should treat comparisons of yields before and after 1982 with
caution. Research shows that the overall proclivity to return cash has not
changed much over the decades, but the means by which the payout occurs has
Academic research shows that rapid asset growth is associated with poor total
shareholder returns. Further, companies that contract their assets often create
substantial value per share. Ultimately, the answer to all capital allocation
questions is, 'It depends.' Most actions are either foolish or smart based on
the price and value.
Internal financing represented almost 90% of the source of total
capital for US companies from 1980-2013. This is a higher percentage than that
of other developed countries including the United Kingdom, Germany, France, and
Morgan Stanley analysts said in July:
Capex: Average age of US industrial equipment at
highest since 1938 - Part 1
"It's clear that persistently weak investment in the aftermath of
the recession has had a serious impact on normal capital deepening and dragged down productivity. While we can
reasonably expect investment levels to fall after a recession, we have seen a period of persistent weakness in
business investment in equipment that has impaired the economy's trend growth potential as it continued
year after year.
Waiting for business investment to accelerate has been a painful
and thankless exercise. Yet we find the necessary ingredients are present for capex to pick up.
What's sobering is that even among
these emerging positive signs, a lower rate of potential growth in the economy
likely implies a lower rate of equilibrium investment levels.
That means that even as the
headwinds from factors such as increased M&A activity lift, our expectation for a modest cyclical upturn in
investment may indeed by as good as it gets. A more historically normal cyclical pickup, something in excess of 8%
annually, simply looks unrealistic.