Trump tax windfall going to capex way faster than stock buybacks

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Chalk up a win for capex.

After months of heated debate over whether companies would hand the biggest tax break in three decades back to shareholders or reinvest it in their businesses, there’s finally some hard data.

Among the 130 companies in the S&P 500 that have reported results in this earnings season, capital spending increased by 39 percent, the fastest rate in seven years, data compiled by UBS AG show. Meanwhile, returns to shareholders are growing at a much slower pace, with net buybacks rising 16 percent. Dividends saw an 11 percent boost.

The data is a fresh rebuttal to those who warned that hundreds of billions of dollars of tax relief will head directly to the stock market and be harvested by shareholders already fattened by a nine-year bull market. While buybacks indeed got a boost from the windfall, companies increased the rate at which they unleash cash for building factories and upgrading equipment, a strategy that’s preferred by investors for the benefit of future growth.

Corporate buybacks, while increasingly a key pillar of the second-longest bull market on record, are constantly drawing criticism from politicians and money managers as being short-sighted. By their line of logic, companies take advantage of low interest rates to borrow money and buy back shares as a quick way to boost per-share earnings. In doing so, they’re forgoing investment opportunities that may benefit long-term growth.

In the past year, shares of companies with the highest layouts on repurchases and dividends relative to market value are trailing those that spend most on capital expense by almost 5 percentage points, according to data compiled by Goldman Sachs Group Inc. and Bloomberg.

Fund managers cited capital spending as their most favored way of using corporate cash, followed by improving balance sheets and returning money to shareholders, according to a march survey by Bank of America Corp.

For now, investors seem to be getting what they wanted.

Bloomberg News
Tax reform Trump tax plan Corporate taxes Buybacks Donald Trump UBS Goldman Sachs Bank of America Bloomberg