Capital Spending Is Up. Why Aren't Shareholders Happy?

Summary

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WSJ Your Money Briefing Podcast Summary

Episode:

Title: Capital Spending Is Up. Why Aren't Shareholders Happy?
Date: May 16, 2018
Host: J.R. Whalen (B)
Guest: Akane Otani, WSJ Markets Reporter (C)
Main Theme:
Examining why a significant rise in U.S. corporate capital expenditures (capex) isn’t generating enthusiasm among shareholders, despite implications for economic growth and companies’ long-term prospects.

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Episode Overview

This episode explores the surge in capital spending by U.S. companies—growing at its fastest pace since 2011—and questions why shareholders aren’t celebrating. J.R. Whalen and Akane Otani discuss the underlying reasons, investor psychology, the implications of tax reform, and notable case studies of companies like Amazon that defy the trend.

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Key Discussion Points & Insights

1. Current State of Capital Expenditure

• Recent Surge:
  • Companies are spending more on factories, equipment, and other capital investments—up 24% year-over-year (03:26).
  • This is the fastest rate of increase in nearly seven years (03:00).
• Change in Attitude:
  • Businesses are moving away from financial caution after years of “reeling back” post-financial crisis (02:11).

2. Why Has CapEx Been Held Back?

• Financial Discipline:
  • Companies faced investor pressure to be cautious post-2008, focusing on demonstrating “financial discipline” and retaining cash due to economic uncertainty and previous losses (02:11).
• Energy Sector Impact:
  • Collapse in oil prices (2014-2015) caused dramatic cuts in energy spending (02:11).

3. The Influence of Tax Reform

• Tax Law Effects:
  • New tax laws incentivized repatriation of overseas profits with a one-time lower tax rate, adding significant cash to balance sheets and enabling more investment options (03:03).
• Companies’ Dilemma:
  • Firms now debate whether to invest in long-term assets (like equipment or property) or return cash to shareholders (03:38).

4. Investor Perspective: Why the Cool Reaction?

• Short-Term Focus:
  • Despite the potential for higher future profitability, shareholders remain lukewarm about increased spending because they prioritize immediate returns—“what have you done for me lately?” (04:00).
• Historic Underperformance:
  • Data from Bank of America over decades shows that the top 20 firms with the highest CapEx actually lag behind the broader S&P 500 both recently and historically (04:15).

5. Shareholder Preferences: Buybacks and Dividends

• Appeal of Immediate Returns:
  • Shareholders favor buybacks and dividends because these offer quick, tangible gains versus uncertain or delayed benefits from capital investments (05:19).
• Quote:
  • “A dividend boost is something that you'll see in your bank account next month, a capex increase... that's something that you might not see reflected in the bottom line for quite some time, if ever.” – Akane Otani (05:26)

6. Exceptions to the Rule: Amazon

• Long-Term Growth Can Win:
  • Amazon remains a key outlier—one of the largest CapEx spenders, yet its stock rises over 30% for the year, beating the broader market (05:54).
  • Investors trust Amazon’s consistent sales and growth performance, so they tolerate or even embrace high spending (05:54).

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Notable Quotes & Memorable Moments

• On historic investor caution:
  • “Companies have been really trying to reel back their spending and demonstrate to investors that they can exercise financial discipline.” – Akane Otani (02:11)
• On the rise in capex:
  • “Spending is up by 24% year over year.” – J.R. Whalen (03:26)
• On the shareholder attitude:
  • “Shareholders are sort of cool to the idea because they are more looking for short term results. Kind of like, what have you done for me lately?” – J.R. Whalen (04:00)
• On the temptation of dividends vs. capex:
  • “A dividend boost is something that you'll see in your bank account next month, a capex increase… that's something that you might not see reflected in the bottom line for quite some time, if ever.” – Akane Otani (05:26)
• On Amazon’s exception:
  • “Amazon… is actually one of the top spenders on CapEx… and yet its shares have been on an absolute tear this year… investors are willing to overlook increased capex spending because they know the company has a record of sales growth.” – Akane Otani (05:54)

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Timestamps for Key Segments

• CapEx Context & Corporate Behavior:
  • [02:11] Companies’ cautious approach post-financial crisis and post-oil price crash
• Tax Law’s Influence & Surge in Spending:
  • [03:03] Effect of tax reform on cash reserves and capex
  • [03:26] Year-over-year statistics on capex increase
• Investor Reaction:
  • [04:00] Short-term vs. long-term investor thinking
  • [04:15] Historical underperformance of high capex spenders
• Shareholder Preferences:
  • [05:19] Buybacks/dividends vs. capital investments
  • [05:26] Quotable insight on immediate vs. delayed returns
• Amazon as Outlier:
  • [05:54] Amazon’s continued stock success as a heavy spender

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Conclusion

The episode highlights the tension between long-term investment and short-term shareholder returns. Despite tax-induced cash surpluses and optimistic company investments, many investors still crave immediate rewards through dividends and buybacks—except in rare cases like Amazon, where faith in growth trumps concerns about high capital outlays.

Host J.R. Whalen and guest Akane Otani deliver a concise yet insightful analysis, offering both statistical context and a nuanced look at market psychology in a shifting economic landscape.

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Transcript

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] Washingtonwise your money briefing Money and

[B]

market stories from the Wall street journal. I'm J.R. whelan in New York. Capital expenditure by U.S. companies is up, way up, at a pace not seen in almost 10 years. So why doesn't everyone see that as good news? We'll explain in a moment. First, these money headlines. US Consumers are boosting purchases of everything from clothes to furniture on the heels of the US Tax cut and rising wage gains. That's a relief for investors who had worried that soft spending would weigh on economic growth. Analysts had worried that rising gas prices would slow consumer spending in the near term compared with a year earlier. Overall retail sales were up 4.7% in April and spending continued to outpace inflation. And the bitcoin market is about to get a lot faster. Coinbase, which operates the largest US Cryptocurrency exchange, says it will upgrade its systems with services that cater to ultra fast traders. The upgrade is planned for later this year and will make Coinbase one of the first bitcoin exchanges to welcome the controversial business of high speed trading, in which computers are used to buy and sell stocks, futures in other assets. In the blink of an eye. They accounted for 55% of trading volume in the US stock market last year, but they've only recently begun to trade in cryptocurrencies. This is your money briefing from the Wall Street Journal. Welcome back, everybody. It's taken a while, but US Companies are opening their wallets and spending more on factories, equipment and other capital expenditures at a pace not seen in about seven years. Is that good news? Well, it depends on who you ask. And Wall Street Journal markets reporter Akane Ohtani is here to discuss. So Akane, as you point out in your Wall Street Journal story, investors and economists agree that capital expenditures, also known as Capex, are good news for corporate profits in the broader economy. But what's held it back for the past seven years?

[C]

Well, companies have been really trying to reel back their spending and demonstrate to investors that they can exercise financial discipline. This was sort of a big concern in the years after the financial crisis where companies were left pretty strapped for cash. They had to go through layoffs, and investors were looking to see that companies weren't immediately going to funnel whatever extra cash they had left into expensive projects that might not pan Out. Then after oil prices peaked, Most recently around 2014, 2015, we also saw another drop in capex as energy firms were forced to cut back spending and stopped drilling as much. But we've really started to see a pickup in the last three months and that's actually put us on course for the fastest pace of capex since 2011.

[B]

And the tax law has had a lot to do with that, hasn't it?

[C]

Yeah, I mean, it's hard to say for sure how much, but investors are largely attributing the big pickup in CapEx that we've seen recently to the tax law just because it has incentivized companies bringing back foreign profits to the US by offering just a one time relatively low tax on those profits. And companies are now sitting on extra piles of cash and sort of deciding what to do with it.

[B]

And a number you have in your story, just an overall look at the spending is up by 24%. Yeah.

[C]

Year over year.

[B]

And it's not like these companies are having to raise cash. A lot of them have had cash stockpiled on the sideline for years.

[C]

Yeah. And that's why you would think investors would be celebrating this because finally companies are starting to spend money not just on buybacks and dividends, but also on investing in their own businesses, things like buying equipment and upgrading equipment and buying new factories and land and you know, things like that that typically you would think would boost long term profitability.

[B]

But the investors or the shareholders specifically, they're a fickle bunch because while this can be seen as high octane fuel for the economy, shareholders are sort of cool to the idea because they are more looking for short term results. Kind of like, what have you done for me lately?

[C]

Yeah, exactly. So far this year, the top 20 companies that have spent the most on capex are actually lagging behind the broader S&P 500. And when you look longer term, and we had data from bank of America going back a couple decades, the trend held true there as well. So it really does suggest that even though investors are saying they want one thing, history sort of suggests that these companies do tend to struggle a little bit in terms of performance.

[B]

A professor you spoke with said that the rise in spending could actually take the likelihood of another market boom off the table.

[C]

Yeah, I mean, it all sort of goes back to this question right now of we've been in a bull market for nine years and what is the sort of catalyst we need for us to keep. Some people might argue that it is capex and that we do need companies to start investing more in their businesses. But others would say we're so late in the economic cycle that it might be better if companies focused on shareholder returns. And those people would be likely the ones arguing that this is actually not the best use of firms money at the moment.

[B]

That's a good point. Let's not forget about buybacks and dividends as a way to spend money. Who doesn't love a good dividend?

[C]

As one investor I talked to was saying that a dividend boost is something that you'll see in your bank account next month, a capex increase, whether that's a company working on a new automobile rollout or buying up new property in New York City, that's something that you might not see reflected in the bottom line for quite some time, if ever.

[B]

In terms of pressure on shares, it's not really a hard and fast rule that companies that spend will experience that kind of pressure. There are some exceptions, right?

[C]

Amazon being probably the most notable of them. It is actually one of the top spenders on CapEx, according to a number of sources that we used. And yet its shares have been on an absolute tear this year. I mean, it's up over 30% for the year. That's after rising double digit percentages last year. And clearly in that case, it seems like investors are willing to overlook increased capex spending because they know that the company has a record of sales growth and that it's able to deliver growth year over year with other companies. I think the question is a bit more ambiguous.

[B]

All right, that is Wall Street Journal markets reporter Akane Ohtani joining us here in our studio. Akane, thanks for joining us.

[C]

Thanks for having me.

[B]

And that's your money briefing. I'm J.R. whelan in New York for the Wall Street Journal.

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.