Uh-Oh, Stock Buybacks Exceed Capital Spending in 2018

This further fuels the debate over whether corporate America favors investors now or its long-term future.

And the winner is … stock buybacks.

The new tax cut, which includes an enticement to bring back corporate money parked overseas, has given companies a fresh infusion of useable dollars. Small wonder that the bulk of the dough, as of mid-year 2018, has gone to shareholder-pleasing buybacks for the S&P 500.

Capital expenditures, known as capex, also got a boost. Just not the same big boost as buybacks did.

Through the year’s first half, buybacks totaled $362 billion, and capex $318 billion, according to Standard and Poor’s. Compared to 2017’s first half, capex is up 27%, which is good after years of flatlining.

But buybacks rose a whopping 43%. Little doubt the same pattern will prevail for the rest of 2018. (The figures are almost complete from the second quarter reporting period.)

For years, stock buybacks and capital spending have been fairly comparable in total outlays, around $550 billion each. That’s remarkable. Critics of buybacks say they simply line shareholders’ pockets and provide scant benefit for the larger economy—while capex builds the infrastructure for tomorrow’s economic growth, which is a boon for all Americans. 

But capex has been an afterthought of many executives in the sluggish recovery. To them, it didn’t seem prudent to spend heavily if consumers weren’t going to respond by opening their wallets.

Larry Fink, the chief executive of the world’s largest asset manager, BlackRock, has criticized share buybacks for undermining a company’s long-term strategy.

A 2015 study by US economist Heitor Almeida found that share buybacks can have a detrimental effect on research and development spending.

On the other hand, buybacks are a sweet reward for investors who have stuck by a company, perhaps through hard times

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