S&P 500 buybacks soar while companies skimp on investment, salaries

Companies in the Standard & Poor's 500 index are set to spend $914 billion US this year on share buybacks and dividends.

That figure, based on data compiled by Bloomberg and S&P Dow Jones indexes, represents about 95 per cent of their earnings.

The trend of returning money to shareholders comes at a time when companies are putting less into their own capital expansion and returning only a marginal amount more to workers.

• Income inequality slowing U.S. recovery, ratings agency says
• Thomas Piketty and the economics of inequality

Stock repurchases have more than tripled since March 2009, and the proportion of cash flow used for repurchases has doubled in the last decade.

The S&P 500 index, a broad-based U.S. index meant to represent the range of companies in the U.S. economy, has had a rapid run-up this year. Even with last week’s losses, it’s up 7.5 per cent since January 2014.

Low interest rates have made stock buybacks cheaper for companies, and the lure of big dividend or buyback returns has attracted more money into stock markets.

Can bull run continue?

But analysts question whether the bull run can continue if companies do not invest more in upgrading their processes and expanding their businesses.

“If management can’t unearth future opportunities for growth, as a shareholder, I lose confidence,” Randy Bateman, chief investment officer of Huntington Asset Advisors, told Bloomberg.

The portion of cash flow used for capital spending has fallen to about 40 per cent among U.S. companies, a 20 per cent drop since 2002, according to Barclays.

U.S. companies now have the oldest plants and equipment in almost 60 years, with the average age of fixed assets reaching 22 years in 2013.

Widens inequality

Companies may hold onto cash because of slow economic growth, but the lack of investment can also hold back the economy.

It also widens overall inequality. U.S. corporations have improved their profitability in the past three years, but the money has gone mostly to the investor class rather than workers.

• Top 1% taking lion's share of global growth, OECD says
• Free money for all could jumpstart the economy: Don Pittis

Cash returned to shareholders exceeded profits for S&P 500 companies in the first quarter of 2014 and may also exceed profits in the third quarter, data compiled by Bloomberg and S&P shows.

The average industrial wage has risen just 1.8 per cent annually since 2008. That and high levels of unemployment have cut the spending power of U.S. workers, who are more likely to drive growth by spending in their communities.

The accelerating pace of buybacks also cuts into government revenues, as dividends and capital gains are taxed at a lower rate than income. This tax structure has spurred pressure by hedge funds and activist investors to push for more share buybacks.