Corporate investment in factories and equipment broke records last year but companies that return cash to shareholders had better stock gains, according to Barclays Capital Plc.
The bank compiled a list of 18 companies with low capital expenditures in relation to stock buybacks that includes Celgene, Express Scripts and Monsanto.
“The market has not rewarded capital expenditures,” said Jonathan Glionna, head of U.S. equity strategy at Barclays, referring to money spent to buy or improve equipment and buildings. “The stocks of companies that invested a large portion of cash flow in capital expenditures performed significantly worse than companies that instead returned capital to shareholders through buybacks.”
The comparably poor performance of high-capex companies can partly be attributed to the energy industry. Drillers have significant investments in equipment, but have been pressured by a 50 percent plunge in oil prices from a June high of about $107 a barrel.
“A substantial decline in spending from the energy sector will weigh heavily on overall capital expenditures for the S&P 500,” Glionna said in a March 30 report
obtained by Newsmax Finance. Energy “is the largest sector in terms of capital expenditures.”
Energy companies will slash spending from last year’s $225 billion, which was highest among all industries, according to Barclays. The bank estimates a change in capital expenditures of 1 percent to negative 3 percent in 2015 from the prior year with energy’s likely pullback.
Capital expenditures for the S&P 500 climbed to a record $730 billion last year, a 25 percent gain from the prior peak reached in 2008. While that spending rose 11 percent in the past two years, stock buybacks have jumped 45 percent and dividends have climbed 21 percent, according to Barclays.
While investors say in surveys that they prefer companies to invest cash flow in plant and equipment that lead to higher growth and better competitiveness, the companies that give back cash are ones that outperform, Barclays said.
“When it comes to performance in the market, the stocks of companies than spend less on capex remain clear winners,” Glionna said.
The bank compiled a list of stocks with low comparable capex that outperform in rising markets (see below).
With an improving economy, Home Depot Inc. is a good investment, said Marc Pinto, who oversees equity strategies at Janus Capital Group Inc.
Home Depot “will perform well as long as the economy gets better, the housing market gets stronger, and as long as the Fed doesn’t get in the way and cause problems,” he said in an interview
on Bloomberg Television.
Pinto also recommended Apple Inc. and Union Pacific Corp. Apple has “absolute domination of the high end” of the smartphone market, he said.
While Union Pacific faces headwinds with lower commodity prices, they “can continue to grow quite nicely,” he said.
18 Stocks With Low Capex to Net Stock Buybacks (company, ticker)
- AES Corp., AES
- Cameron International, CAM
- CBS Corp., CBS
- Celgene, CELG
- Express Scripts, ESRX
- Expeditors International, EXPD
- F5 Networks, FFIV
- Illinois Tool Works, ITW
- Lincoln National, LNC
- Altria Group, MO
- Monsanto, MON
- Marathon Petroleum, MPC
- Philip Morris, PM
- Prudential Financial, PRU
- Sherwin-Williams, SHW
- Integrys Energy, TEG
- Viacom, VIAB
- VeriSign, VRSN
Source: Barclays Research
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