US businesses, feeling heat from activist investors, are slashing long-term spending and returning billions of dollars to shareholders, a fundamental shift in the way they are deploying capital.
Data show a broad array of companies have been plowing more cash into dividends and stock buybacks, while spending less on investments such as new factories and research and development.
As the trend picks up steam, so too has debate about whether activist investors—who take sizable stakes in companies, then agitate for changes they think will boost share prices—have caused companies to tilt too far toward short-term rewards.
Vipal Monga, David Benoit, and Theo Francis in their Wall Street Journal article at the link lay the bulk of this reallocation of business funds to activist investors demanding a prompt return on their, and other investors’, return. In truth, there’s a lot to this.
There’s another factor though, that plays at least as important a role: government regulation. Regulation compliance cost the US $1.86 trillion in 2013—11% of our GDP. That’s the general case; there also are regulations surrounding increasing—even improving existing—physical plant. The EPA’s new water “protection” rule, for instance, gives the EPA—the EPA!—a say in whether, and under what conditions, a new factory can be built.
And taxes. Despite lots of Congressional chit-chat, there remains on the books, for instance, the medical device tax of Obamacare, a tax that takes money off the top line revenue—revenue coming into a company before the first dime is spent on company-related things. A tax that’s already caused companies to cancel expansion plans or to move them overseas.
Regardless of the cause, though, whether activist, regulation, to taxes, this misallocation of funds can only have a negative effect in the mid- to long run, even though it’s a short-term good for investors like me. This sort of thing is bad for business’ competitiveness and bad in the aggregate for American global competitiveness and technological leadership.
Should our government do anything about this? Of course not, at least not directly. It is bad business to allocate all those funds to buybacks and dividends at the expense of expansion, upgrade, and innovation, but the real economy, the private economy where actual citizens and market participants live and work, will do a fine job of handling this. There’s no need for government to “get impatient” and step in, because the time lags between the stock market and the actual economy are so variable and unpredictable. Which lags make it positively counterproductive for government to interfere.
It would be good, though, if our government moved to reduce the cost of regulation. A good first step would be simply to rescind a random 10% of existing regulations, and then begin serious rescission from there. After that, the real economy will deal with the activists.