Moments ago UPS did what almost every other company so far in this, and prior, earnings seasons has done: posted unimpressive earnings (EPS of $1.25 meeting expectations), while missing revenues, with Q4 sales of $15.0 billion below expectations of $15.2 billion. We already know the explanation [3]- as the company preannounced, the "only reason" its business slowed down in Q4 was due to a... surge in business surrounding the holidays for which the management was unprepared, because apparently the UPS C-suite was unaware how to read a calendar. And, most expectedly, to offset all the bad news, UPS announced it would continue doing what all companies facing a slowing economy do: not invest in Capex while buying back another $2.7 billion in shares in 2014.
But the point of this post is not to spread UPS earnings, but to highlight the biggest cyclical failure of the Bernanke era - one we first highlighted two years ago [4]- when we observed that in the new normal, companies invest not in CapEx but in dividends and buybacks, seeking to appease short-term activist investors while leaving the long-term future of the company flailing in the wind. So here it is, from the earnings release:
For the year ended Dec. 31, UPS generated $5.3 billion in free cash flow, producing a net income-to-cash conversion ratio of more than 120%. The company paid dividends of $2.3 billion, an increase of nearly 9% per share over the prior year, and repurchased more than 43 million shares for approximately $3.8 billion.
This free cash flow is the result of $7.3 billion in cash from operations, from which $2.1 billion in CapEx was reduced.
In short here is how UPS allocated all of its created capital in 2013:
- $3.8 billion in Buybacks
- $2.3 billion in dividends
- $2.1 billion in CapEx
Here is the advice for the central planners: until the bullets above read CapEx 100% of capital allocation with buybacks and dividends get 0%, the economy will not improve, period.