New York Times Editorial - Failing to invest
New York Times Editorial - Failing to invest
Copyright by The New York Times
Published: June 20, 2006
By and large, U.S. companies are flush with cash. That has led many economists and policy makers to predict that an upsurge in business investment will smooth the sharp edges of the next economic slowdown. The thinking goes like this: As consumers retrench in the face of higher gas prices, higher interest rates and staggering household debt, companies will pick up the slack by spending their accumulated fortunes on equipment, technology and factories.
But such thinking may turn out to be more wishful than wise. Corporate America has been piling up cash for some time, yet business spending has not been particularly robust. It's not in the doldrums, but it's not on a tear, either.
And instead of investing, many companies are choosing to distribute their cash to shareholders. The preferred method for doing so, by far, is to buy back the company's own stock. Buybacks benefit shareholders because they reduce the number of shares outstanding. That, in turn, bolsters the earnings per share, and generally the price, of the remaining shares.
There's nothing wrong with returning money to shareholders. But companies generally do so only when they can't find a better alternative. In general, buybacks are an indication that there are no investments on the horizon that represent a superior use of the company's money. Another downside to buybacks is that they can give a false impression of corporate performance. Higher earnings per share are generally thought to result from real improvements, like higher sales. But buybacks can enhance the stock price - and thus mollify unhappy investors - without increasing overall earnings. So, on the one hand, buybacks are a sign that good investments may be lacking. On the other, they can give investors the impression that the good times are rolling.
Mixed signals are to be expected when the economy is in transition, as it is now. What's important for policy makers is to avoid complacency that comes with thinking there's a silver bullet - like business investment - for escaping the worst potential effects of a slowdown.
Copyright by The New York Times
Published: June 20, 2006
By and large, U.S. companies are flush with cash. That has led many economists and policy makers to predict that an upsurge in business investment will smooth the sharp edges of the next economic slowdown. The thinking goes like this: As consumers retrench in the face of higher gas prices, higher interest rates and staggering household debt, companies will pick up the slack by spending their accumulated fortunes on equipment, technology and factories.
But such thinking may turn out to be more wishful than wise. Corporate America has been piling up cash for some time, yet business spending has not been particularly robust. It's not in the doldrums, but it's not on a tear, either.
And instead of investing, many companies are choosing to distribute their cash to shareholders. The preferred method for doing so, by far, is to buy back the company's own stock. Buybacks benefit shareholders because they reduce the number of shares outstanding. That, in turn, bolsters the earnings per share, and generally the price, of the remaining shares.
There's nothing wrong with returning money to shareholders. But companies generally do so only when they can't find a better alternative. In general, buybacks are an indication that there are no investments on the horizon that represent a superior use of the company's money. Another downside to buybacks is that they can give a false impression of corporate performance. Higher earnings per share are generally thought to result from real improvements, like higher sales. But buybacks can enhance the stock price - and thus mollify unhappy investors - without increasing overall earnings. So, on the one hand, buybacks are a sign that good investments may be lacking. On the other, they can give investors the impression that the good times are rolling.
Mixed signals are to be expected when the economy is in transition, as it is now. What's important for policy makers is to avoid complacency that comes with thinking there's a silver bullet - like business investment - for escaping the worst potential effects of a slowdown.
posted by Carlos T Mock at 7:55 AM
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