Corporate eye on expansion could benefit funds
NEW YORK — After years of funneling cash to investors, companies may be looking to spend more on themselves. Mutual fund managers are cheering, even if those dollars could have gone directly to them through dividends and stock buybacks.
That's because increased corporate spending on new factories, equipment and computers could help push the economy into its next, more sustainable stage of growth. In the short term, it means companies that play a role in building the new factories or selling the new equipment would benefit from increased revenue. In the long term, it means that companies are investing in ways to drive future sales growth. Both would benefit the entire market.
Consider Linda Bakhshian, one of the managers of the $2.1 billion Federated Capital Income fund, among other funds. She's a dividend-focused investor who prefers not only that stocks have high yields but also that the companies are in position to keep increasing their payouts.
Given that approach, one might expect she was disappointed when Whirlpool, one of her funds' holdings, said in the spring that it will spend as much as $675 million on new equipment and other capital projects this year. That would be up from the $578 million it spent last year, and it's money that could have otherwise gone to increasing its dividend. Whirlpool on Friday said it would spend $1 billion for a controlling stake in an Italian appliance maker.
But Bakhshian saw upside: The increased capital spending will help Whirlpool develop products and boost its growth. Plus, the company already increased its quarterly dividend 20 percent in April.
“You don't want a company to pay everything out in dividends or share buybacks and not invest in their own company,” Bakhshian says.
Companies have largely been delaying capital spending for years, hoping to hold the line on expenses and boost profits. And it has worked: Earnings per share for companies in the Standard & Poor's 500 index grew faster than their revenue. That's helped to lift stock prices to record highs even when economic growth around the world has been only tepid.
But the spending slowdown means companies are contending with slower computer systems and other aging equipment. Many of those same companies, meanwhile, are sitting on mounds of cash. The 2,000 companies with the biggest capital spending globally have a total of $4.5 trillion, according to Standard & Poor's.
A record percentage of fund managers around the world — 63 percent — are calling for companies to increase their capital spending in hopes of driving growth, according to the latest monthly survey by Bank of America Merrill Lynch.
Historically, companies with high capital spending relative to their revenue have seen their stocks lag behind their peers. But that turned around earlier this year, and shares of companies that were in expansion mode did better, according to data compiled by Bank of America Merrill Lynch.
To be sure, not everyone is expecting a big increase in investment. In North America, capital spending is forecast to rise 1 percent this year, after taking inflation into account, according to Standard & Poor's. That's still better than the rest of the world. Globally, S&P says capital spending is forecast to drop 0.5 percent this year, following last year's 1 percent drop.
Many companies have been hesitant to spend due to a lack of confidence. CEOs don't want to commit to spending money unless they're sure sales can sustain the expense. But confidence appears to be improving: U.S. chief financial officers say they're comfortable enough to expect capital spending to rise 9.3 percent in the next 12 months, according to the most recent survey by Duke University and CFO Magazine. That's up from a year ago, when CFOs were forecasting growth of 6.1 percent.
If a trend starts in increased corporate spending, it could quickly build momentum, says Jerry Webman, chief economist for OppenheimerFunds.
“As my competitor begins to expand, I've got to expand,” Webman says. “If I expand, then the third person has got to expand.” It would be the opposite of what's happened in recent years, as companies felt less pressure to expand because their competitors weren't doing so either.
Once those pocketbooks do open up, Webman says investors should also keep an eye out for companies that may be unfairly punished by short-term traders. When companies boost investment in themselves, the increased spending can cause profit margins to fall, which could lead to some disappointing quarterly earnings reports.
“Investors need to think long term and not be spooked,” Webman says. If the company has a history of being a prudent spender, and just one quarter's worth of results falls below expectations because of its increased capital spending, that may be a buying opportunity.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Chevron gains approval for $1B refinery project
- Hyundai recalls 883K Sonatas to fix gear shifters
- Vigorous economy growing roots
- Fed offers a dual message on health of economy
- 11,000 Kawasaki vehicles recalled for injury risk
- State to seek comments on drilling below Loyalsock State Forest
- Sprint CEO weighs price cuts
- Lenders could move against Anchor Hocking as extension expires
- Consol Energy posts $25 million loss despite gas gains
- Investors content with pace on stocks even in face of good news
- Tech giants lead rush for profits in foreign countries