As we predicted in April of 2012 [6], 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 [7]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 [8]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...