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Why The US Capex Drought Will Continue: Archer Daniels' CEO Explains
As we predicted in April of 2012, the most important pillar of a self-sustaining, "virtuous" US recovery - investment in future growth through capital spending - has been missing and will be missing as long as the Fed's intervention policies in the economy provide shareholders (and management teams) with a far quicker way of generating returns by using excess cash flow to buy back stock and boost dividends (in the process keeping activist shareholders happy). And who can blame them: in an age of instant gratification, shareholders care about cheap-credit funded cash now, not decades from now. Needless to say, employees end up suffering the most since without revenue growth, companies are forced to keep trimming overhead which explicitly means firing more workers just to match Wall Street's (declining) EPS consensus.
Since that article our observations were proven correct, and now that the CapEx drought has become a mainstream topic, it bears reminding that this phenomenon will continue indefinitely, and certainly as long as CapEx hurdle rates are far greater than issuing a low-yielding bond and using the proceeds to reward shareholders: indeed, this shareholders friendly topic has been perhaps the dominant theme of 2013 when activist investors stormed to the forefront once again, most prominently in the face of Carl Icahn, and have managed to force even lower revenue growth prospects by levering companies with debt loads that are now greater than during the prior credit bubble peak.
Naturally, one after another bank has come out once again, as they did, and is predicting that the great deferred CapEx renaissance is upon us... any day now. Unfortunately, it isn't. And just to confirm this, here is Archer Daniels Midland summarizing the company's plans for its 2014 free cash flows. In short: they don't involve any US growth CapEx spending at all.
"Our continued strong cash flow generation and our confidence in the future earnings power of our company allow us to significantly increase our quarterly dividend," said Patricia Woertz, ADM's chairman and CEO. "Historically, we have paid out approximately 20 to 25 percent of earnings; going forward we will aim for a range of 25 to 30 percent, thereby allowing shareholders to participate more directly in the earnings stream of the company."
The company also announced that it intends to buy back from its shareholders 18 million shares of its stock by the end of 2014 to fully mitigate the dilutive impact of equity units converted in 2011 and compensation and benefit plan issuances in 2013 and 2014. At current prices, this would represent about $725 million. To the extent that ADM's credit metrics improve throughout the year and the company receives significant proceeds from asset sales, the company will consider further distributions to shareholders later in 2014 in the context of its capital allocation strategy.
Woertz also provided some detail on the company's 2014 business plans, noting that from the cash flows to be generated in 2014, it expects to invest about $1.4 billion in capital projects, with the majority of the growth capital invested outside the U.S., and will return about $1.4 billion to shareholders in the form of the higher dividends and the repurchase of 18 million shares.
"We will continue to take a balanced approach to capital allocation."
So balanced that growth capital spending in the US is not even on the radar. Unfortunately, ADM is indicative of what the capital spending plans of the the vast majority of US-based companies for 2014 look like. But any day now though...
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Tyler short DE?
"So balanced that growth capital spending in the US is not even on the radar."
The technical term for this is "burning the furniture".
The mob calls it a "bust out". Invest nothing in the business, while running up huge debts, then setting the place on fire and collecting the insurance.
In this case, "insurance" will be "federal corporate bailouts".
"To the extent that ADM's credit metrics improve throughout the year and the company receives significant proceeds from asset sales,"
Asset sales ..... hmmm. Pretty shure that means circling the drain.
They only have to call Pauly:
http://www.youtube.com/watch?v=ZPtjyqgZAUk
But they are investing in the business - they're just doing it overseas. If you think the $1.4 billion in foreign investment won't improve the company, then I think you're reading too selectively.
Capital is now worthless in the USA. You can presume any competitor bigger-i.e any megacorp-has access to your NSA data files which precludes any intellectual privacy whatsoever if you assume the NSA is "doing their job"
Add the local, state and federal regulatory and tax burdens-well any new venture is basically strangled in the cradle.
Probably only a massive federal dislocation could break things open eough to make capital worthwhile again
ADM grows poison, anyway.
Organic for the win!
ADM buys, mills, and transports. How is that such a profitable business? ADM enforces the government's food subsidies in exchange for guaranteed profits and protection from competition (similiar to the fascist deal the Federal Reserve Act and the Affordable Care Act grant to banks and insurers companies, respectively).....
hedgeless_horseman
Most farm subsidies are actually just transfer payments of money
taken via taxes from the wealthy minority to pay a portion of the cost
of food for the many food consumers that do not pay taxes; nearly 50% of
the US, if I remember correctly.
Price paid to farmer = government subsidy + artificially low "market price"
The whole "paying farmers not to produce" is just a distraction, and represents very little of the actual payments.
This inflation effect would be additive to dollar
depreciation, should tax revenue not be available to subsidize the price
of food.
>> that do not pay taxes; nearly 50% of
the US,
Everybody pays taxes, it's just a matter of what taxes do you pay.
I was referring to income tax; we all pay The Inflation Tax.
HH - I am disappointed, I like your writings but you're really letting me down here.
While the ADM flagship is ethanol, it is easy to assume they will have a very profitable year, corn is in a massive bear market while ethanol and oil are relatively high. Last year despite negative margins in ethanol for much of the calendar year, the Ethanol division made a profit of rought one million dollars. Imprassive considering the market conditions, but painful for the crown jewel of such a massive corporation. This year it is safe to assume that ethanol margins will be healthy and as such ADM can dump more money into their dividends to raise their stock prices. The analysis of the strategy by Tyler is spot on.
As for crop subsidies, they primarily function as crop insurance. They destroy competition in the crop insurance sector, but because the business model of crop insurance factors in the five year average of individual field yields, crop insurance and farm subsidies aren't a never ending golden goose for farmers. In years like 2012 where many farmers saw a complete crop failure, their 2013 insurance instantly takes a massive hit. The easiest way to look at farm subsidies would be to think of them as a government sponsored put. A Bernanke put if you will, the free market could concievably perform this function but it would take time to make the switch.
If you read The Great Deformation, you would be familiar with the notion that the great depression began because the expansion of credit in agricultire created a bubble. Ag has recently seen a similar expansion of credit, and in a business where your backbone - the farmers - have to take out massive loans at the beggining of each crop year, a widespread crop failure like the one in 2012 would prove catastrophic for the farmers who make the cornerstone of one of the largest sectors of the global economy.
Ironic (or maybe not) that one of the best examples of a Govt protected and supported crony-fascist company (ADM) is planning the majority of their upcoming capital investment outside the USA.
highly approved behavior by the One World, anti-patriots, in Washington.
I don't care about facts! I care about sowing the seeds of discontent!
CAPEX???
Why? Too much capacity already exists in almost all facets of the economy except for oil production...
We could use a new lead mine. Last one is about to close rather than spend millions to upgrade to new & improved EPA standards.
Yes, we need a new Lead Mine; and a Rare Earths mine, (they aren't so rare, there's a major deposit in several places in the US), but we aren't going to have anyt hing but poverty and disfunction until we get rid of the EPA, and the rest of the alphabet soup in Washington; seceeding from the UN would also be an excellent idea. The problem is Government. Having two government supervisors for every person who wants to do something useful has been tried already, in Russia; it didn't work.
Are you familiar with Molycorp?
If they cannot make a go of the Mountain Pass mine, then no one can...
Take your bullshit arguments about the EPA elsewhere, or did you miss the posts about smog in China?
BTW. leaving the UN would accomplish jackshit...
How many PEA employees are currently working in China? Because other than killing jobs in the US they are currently worthless.
This agency performed valid and worthwhile activities at one time but just like a majority of .gov agencies as they age the locus of of their work becomes self preservation of their budget and the head count so as to keep their own power and pension.
How come the EPA no longer goes after the big guy and yet they never fail to go after the big guys smaller competion?
Look, we can discusss things, but you must stop making shit up...
It's very simple...
There is nothing wrong with the Doe Run mine or its source of lead. There is a plethora of heavy metals, including galena in the hydrothermally altered mineral belt of SE Missouri.
It's the smelting operations the EPA shut down. Mining and processing of lead concentrate will continue.
I just bought 2000 rounds of ammo last week on this news.
And it might be pointed out that the overcapicity you speak of is highly dependent on oil production.
That was the point, glad at least some one was not asleep...
one morning flak is going to wakeup, look around put on his winter jacket and hat, and it will hit him, AGW never was real..that day is not far off. the data is not looking good flak, how long can you ignore snow falls in Egypt and say it's just weather..soon flak soon.
Troll...
not a good reply flak, where's the non sequitor question you were so versed at? or just stamp your feet and tell us all that the sea levels have risen and NYC is underwater or some other factless prediction made by AGW believers, no snow fall in winter was one I remember well..what happened??
I can only imagine that you, overmedicated, are what?...70?...80 years of age? And no kids?
Yes, when your future is a dirt bath about 10 years from now, regardless of what people do to screw up the planet, it makes sense that you would take the position that you do.
no, yes I am older, with a large family, with age comes wisdom was once respected. today the young are brain washed to think man is the problem with earth and is even able to destroy earth..that I laugh at. with an education that asked me to question and a science backround, the data for AGW is garbage..fudge factors in computer models with data that never matches reality. the planet was very hostile to life for billion + years all on it's own, ma nature determines what the earth is like, not any man.
overmedicated...that sounds like "Faith" talking. I suppose you think, deep down, that the tooth fairy would NEVER let humanity wreck this planet.
I've always said that religion and "Faith were the most dangerous human inventions. It will likely kill us all.
no, much like the students I had in grad school, I would often ask this simple question: " if the earth is so polluted by man why have ave life spans for humans increased every decade? a simple question that might open "your eyes wide shut"
Did they get their money back?
LOL no in fact they liked it that I did not bring politics into a science course, just data points to make them think the only tool we have is to never be so sure that data that does not fit is discarded as they did with AGW - man can destroy the environment for those who love the recent past and present of earth, but ma earth has delt the hand from a ball of fire to our present nothing is static.
Let us know when you are finished creating strawmen....
When are you going to stop hating the wrong people?
You know like the ones who do not agree with you?
I don;t hate people, but I do enjoy calling out their bullshit....
You are entitled to your own opinions but not your own facts as the old saw goes...
Look, overmedicated...you are -way- out of the mainstream of scientific consensus. That feeling you have of being a "rebel" is what we call HUBRIS. You need to check your ego and take a look at the science again. Climbing Carbon Dioxide levels alone should give you the willies and raise your concerns...as a "scientist" which you claim to be.
Russian roulette is not any game for a scientist to be playing especially when the victims will be their children.
"The study is the most comprehensive yet and identified 4000 summaries, otherwise known as abstracts, from papers published in the past 21 years that stated a position on the cause of recent global warming – 97 per cent of these endorsed the consensus that we are seeing man-made, or anthropogenic, global warming (AGW)"- http://www.iop.org/news/13/may/page_60200.html
You should try an experiment. Submit a proposal for a study that posits global warming is real and one that doesn't, and see which one gets funded.
TwoCats...we'd have to pull that climate denial study out of your ass.
Seriously, scientific papers generally start with an assumption of the Null Hypothesis. Going into a study, the scientist makes the assumption that changes are NOT outside of historical trends. Data is collected and in a nonbiased manner and the chips are allowed to fall where they will. Excluding data or falsifying data is heresy in the scientific circles.
When statistical analysis disproves the Null Hypothesis with high levels of confidence there still is a high suspicion of any single study. Only after many studies are conducted and many studies constructed from varied methodologies do we finally conclude that the Null Hypothesis for a given circumstance or question is resolved.
Manmade Global Warming has been extensively studied and the conclusion that it is real is now accepted by the vast majority of scientists.
97% of climate scientists to be more precise....
BTW, I like the cut of you jib....
You seriously asked your grad students that foolish question? There are multiple reasons why lifespans have gradually increased since the early 20th centurybut the main was due to public health policies and innovations.
I doubt very much he has had any students let alone grad students....
You can always spot the consummate bullshitters of his ilk...
Quit making shit up and, better yet, just go away....
this is true; also it is characteristic of all major depressions; and it is almost never "noticed" or discussed, because it's not a favorite topic of the Mass Media, their favorite topic is "growth"; which is now over; done, and finished. The technical term is "over installed capacity"; and we can see it in most places, where the government hasn't already regulated alll business activity to a standstill. Intended as a reply to Flakmeister; I don't know why these things end up where they do.
I would love to have a discussion with you about the state of things, but you clearly have an aversion to debates that are fact based...
creating profits via investment in lobbyists for $10 million is more productive than spending $100 million on capex - create corners for margin expansion in mature products by restraint of trade via biased and paid for rules regulations and laws - and move the capital overseas where there is politicians to buy entirely new markets - makes sense for the long term -
for ADM if ethanol and fructose were outlawed as too costly a subsidy and non productive in the case of ethanol or carcigenic in the case of fructose - which has been proven - they would have to create a new US based business model - otherwise they coast along
the entire US is about rents in this form and other examples for the foreseeable future until the free cash flow runs out of the consumer.
it has nothing to do with cost of capital - smoke screen
omen it is not cost of capital it is access to capital and always has been..wall st and international banks have access via the fed not you of course or main street.
ADM - Supermarket to the World!
"the most important pillar of a self-sustaining, "virtuous" US recovery - investment in future growth through capital spending - has been missing "
Maybe that investment is missing because there is good reason to expect that future growth will be missing too.
That would be my understanding of the situation. And along similar lines, 79% bullish opinions about the DOW on Twitter; 110K sample. Good time to go short.
Smart money is always looking for low risk ways to make more money. In the past several decades, growth in almost any industry allowed for pretty safe ways to make more money. Now it would seem that smart money is confused about what to do and avoiding CapEx. What does that imply?
So should I borrow a hundred grand and spend four years studying so that I can get a degree that will allow me to compete for jobs with some foreigner who is happy to earn a hundred bucks per week?
Sallie Mae say yea!
Take up plumbing instead.
Cannot be automated,steady work,plenty of cash deals.
Why even ask, A like of debt serfdom or one walking around with your butt crack exposed.
.
Item 8
Gain, store, and maintain the knowledge, skills, and special equipment that would enable you to do at least one third-world job. If you are a dentist, doctor, farmer, cowboy, mechanic, miner, fisherman, lumberman, mason, blacksmith, whore house piano player, plumber, butcher, or similar, then you are already set. If you are a derivatives trader, banker, realtor, healthcare administrator, politician, actuarial, benefits coordinator, DMV clerk, compliance officer, or similar, then get cracking.
...that is assuming the earnings stay positive.
The author gave us a wink here. ADM is not seeing growth potential for good reason.
Global warming is a huge risk factor and ADM expects food crop/oil crop losses to worsen year by year...hence it cannot choose safe growth areas of agricultural expansion.
Memo to ADM: Change your slogan. "SOYLENT GREEN...people feeding people"
Global Warming is a huge risk factor. You, sir are hilarious. There is no Global Warming; and if there were, on balance it would be beneficial to Agriculture; in which field, global warming is called a longer growing time; the time between too cold to plant, and plants killed by frost. Historically, shorter growing times caused by temporary global cooling events have been very serious for human beings; (mass starvation, including in Europe).
SAT...do you know where there will be too little water and too much water? WHen the Ocean rises 5 then 10 then 30 feet do you know where you will be living? When the oceans are so acidified that the coral reafs all die and fish stocks collapse, are you able to hedge against this?
Or are you another Old Man who expects to escape the consequences by dying soon?
And when massive areas of the costal oceans become dead zones that bloom hydrogen sulfide and methane...what will be your get-out-of -jail free card? The angry mobs will be looking for the Nay-Sayers like yourself...will you step forward and say "Yes, take me...I had been wrong and my hubris was my crime!"...or will you keep your head down and hide?
The planet is undeniably warming. If you want to argue to degree that man is responsible if at all that is a valid question.
As for 'global warming is good because it menas longer growing time' you don't know the first thing about grain production. Most main grain crops have a pretty narrrow band and another 2-3 C would either wipe out their current yields or severly reduce it. Yeah some new land would be opened up in the Northern Hemisphere in Canada and Russia in particular but it wouldn't begin to offset the huge decreases you would see in existing grain belts including SE Asia, Brazil, Ukraine, and Plain States in the US.
BWAA-HAH-HAH-HAAAA!
Al Bore stated almost exactly five years ago, on December 13, 2008, that the "polarized (sic) ice cap" will be gone in 5 years.
To mix my metaphors, and to quote a real statesman, "Some chicken. Some neck!".
Making shit up I see...
Unless of course your moronic drinking buddy at the local watering hole is indeed named Al Bore....
capex spending = robotics. Workers are not needed any more.
With QE, who needs CapEx?
Financing based on future ZIRP is futile and extremely harzardous to later stages of projects as more and more come to realize the vacuum in the pipes.
... and will return about $1.4 billion to shareholders in the form of the higher dividends and the repurchase of 18 million shares.
Repurchasing of shares is NOT a return to shareholders if you are only doing it in order to mop up shares given as compensation.
No surprise on ADM regarding cap ex spending. I wouldn't necessary use them as a proxy for the entire US economy though.
The difficulty is that it is nearly impossible to come up with cap ex spending for large publicly-traded multinationals in specific countries unless they specifcally go out of their way to announce it. Even then, you just get it typically on a broader regional level without a country-by-country breakout.