Business Resource Deployment & Insight It Lends
In light of a prior discussion on very high corporate debt levels, I wanted to point out that for the first time in 10 years share buy backs by corporate America are the largest component of capital deployment. Business should always deploy capital based on the best rate of returns given a level of risk taken. Business always have a choice between investing monies back into their business vs distributing it to shareholders in the form of buybacks or special dividends. Small business do it in the form of "draws" by owners. Either way it's a natural business decision businesses make. But this economic cycle is very different than others because of the level & frequency debt is being used to return monies back to shareholders. To what extent you ask? The chart below shows in record amounts it seems by corporate America. So who cares you say? Well the access to cheap money via artificially low rates appears to be fueling these decisions. Further, assuming corporate america is deploying capital efficiently the return on investment appears higher by returning capital to shareholders vs investing in the business itself. The first question is what does it say about the business? To me, it says they have limited growth potential or else they would be investing in the company vs returning capital to shareholders. The second question is what happens when rates rise and growth slows if a company doesn't invest in such things as R&D and capital expenditures? It appears a company growing earnings through financial engineering ie through share buybacks would be in worse shape vs on investing in new products over the long run. Why? Because innovation thru capital investments or R&D usually lead to higher growth when economic growth returns. Thus, corporate America is basically telling us that they have limited growth prospects in the future.
The point to all this is the way capital is deployed can lend critical insight into its future growth prospects. As a result, it can help determine whether its worth buying irrespective of the historical numbers presented. So consider this as an owner when purchasing a business.