El-Erian Says Corporations Prefer Buy-Backs to New Investments

Mohamed El-Erian writing for the Guardian

Those looking for ways to reduce the risks of inadequate growth agree that, of all possible solutions, increased business investment can make the biggest difference. And many medium-size and large companies, having recovered impressively from the huge shock of the 2008 global financial crisis and subsequent recession, now have the wherewithal to invest in new plants, equipment, and hiring.

Indeed, with profitability at or near record levels, cash holdings by the corporate sector in the United States have piled up quarter after quarter, reaching all-time highs – and earning very little at today’s near-zero interest rates. Moreover, because companies have significantly improved their operating efficiency and lengthened the maturities on their debt, they need a lot less precautionary savings than they did in the past.

However one looks at it, the corporate sector in advanced economies in general, and in the US in particular, is as strong as it has been in many years. Non-financial firms have achieved a mix of resilience and agility that contrasts sharply with prevailing conditions for some households and governments around the world that have yet to confront adequately a legacy of over-leverage.

But, rather than deploy their abundant cash in new investments to expand capacity and tap new markets – which they have been very hesitant to do since the global financial crisis erupted – many companies have so far preferred (or have been pressured by activist investors) to give it back to shareholders.

Last year alone, US companies authorised more than $600bn of share buybacks – an impressive amount by any measure, and a record high. Moreover, many companies boosted their quarterly dividend payouts to shareholders. Such activity continued in the first two months of 2014.

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