In 2014 S&P 500 companies in the US spent 95% of their operating margins on their own shares or in dividend payouts and they are expected to top $1tn in 2015.
According to Bloomberg, excluding the recession years 2001 and 2008, dividends and stock buybacks have represented, on average, 85% of corporate earnings since 1998. The last time payouts exceeded income in 2007, the buyback index fell 4.7%, compared with a 3.5% gain in the S&P 500. Equities peaked that October before losing more than half their value.
Bloomberg added that CEOs have increased the proportion of cash flow allocated to stock buybacks to more than 30%, almost double where it was in 2002, data from Barclays show. During the same period, the portion used for capital spending has fallen to about 40% from more than 50%.
The reluctance to raise capital investment has left companies with the oldest plants and equipment in almost 60 years. The average age of fixed assets reached 22 years in 2013, the highest level since 1956, according to annual data compiled by the Commerce Department.
A 2014 Morgan Stanley research note said that the need for renewed business equipment investment was reflected in the current state of the capital stock.
"By 2012, and after having fallen to a 12-year low in 2000, the average age of industrial equipment shot up to the highest level since 1938. As equipment ages, the rising costs of maintaining the current capital stock should propel spending on business equipment as firms are forced to replace old, retired equipment. Yet replacement alone would result in no net growth in the capital stock. For increased business investment to truly propel the economy, businesses must spend above and beyond simple replacement rates."
The research note said that since the beginning of 2010, when nonresidential structures investment started to recover after the recession, over 80% of the recovery has been due to investment in drilling and mining industries. These areas now total nearly one-third of overall structures investment.
Technology investment appeared to be on a positive trajectory, but remained limited by a recent slowdown in the pace of technological progress as productivity has slowed. "What's more, direct technology spending is a very small share of total GDP so gains will contribute in only a small way to overall growth. Investment in technology appears to have been much more resilient in the aftermath of the recession relative to non-tech investment."
“Share count reduction continues to be the market takeaway,” says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “It has significantly increased earnings-per-share (EPS) for 20% of the index issues in each of the past four quarters. While fourth quarter expenditures were down 8.7%, the number of issues reducing their share count by at least 4% year-over-year, and therefore increasing their EPS by at least that amount, continues to be in the 20% area – a significant level.”
Silverblatt also notes that total shareholders’ returns, through regular cash dividends, as well as buybacks, continues to increase and set records. For the year ended December 2014, buyback and dividend expenditures combined, reached a new record high of $903.7bn, up from the $787.4bn spent in 2013.
“While the $350.4bn in dividends for the year set a record, the $553.3bn in buybacks, which represents 61.2% of the total shareholder return, failed to reach the 2007 buyback bonanza heyday high of $589.1bn,” comments Silverblatt.
Silverblatt stated that issues had a record amount of cash reserves at the end of 2014, and that Q1 2015 cash dividends are on its way to post yet another record quarter, after its record 2014 payout.
“The shareholder return trend has been strong and appears to be increasing,” adds Silverblatt. “Based on the recent bank declarations 2015 may easily be another record year for dividends, potentially, its fifth consecutive annual double-digit gain. Depending on the market, it may be a record year for buybacks as well.”
On a sector basis, Information Technology continued to dominate buybacks, although its percentage of the Q4 2014 buybacks declined to 24.2% from last quarter’s 29.6%. The decline of $10.9bn can be attributed to Apple, which purchased $5bn in the fourth quarter, down from $17bn in the third quarter.
For the year, Apple led the index with a record setting $45bn in purchases, up 73.5% from its $25.9bn 2013 purchases. Exxon Mobil came in a distant second, at $13.2bn, down 17.6% from its 2013 $16bn expenditure, with Intel coming in third, spending $10.8bn, significantly up from its 2013 $2.1bn expenditure.
Barron's said last week that in dollar terms, Apple’s dividend is huge, but the company’s shares yield just 1.66%. The Standard & Poor’s 500 has a 2.04% yield, while the dividend-paying companies in the index boast a 2.36% yield. Apple does yield more than the 1.55% average of the technology sector.
Based on earnings estimates for Apple’s fiscal year ending in September, the company’s payout ratio is 23%. S&P 500 companies as a whole pay out about 35% of earnings in dividends. The $12bn Apple is set to return to shareholders is 18% of the $67.8bn in free cash flow the company is expected to generate this year. In the March quarter, the company’s cash increased 9% to $194bn.
The dividend hike is just part of the story. Apple also significantly bolstered its share-repurchase plan, authorizing an additional $50bn on top of the $90bn announced last year. The buybacks and dividends combined should add up to $200bn in capital returns by March 2017.
The FT noted last Friday that during the current share market bull run, which began in March 2009, the S&P 500 Aristocrats index — 52 companies that have boosted their dividends for 25 consecutive years — has returned 300%. The broad S&P 500 index, including the reinvestment of dividends, is 250% higher over the same period.
According to Bloomberg, the amount of new money coming into the market in 2014, mostly into mutual and exchange traded funds, was just $85bn.