Most economists and stock market strategists agree that a boom in capital expenditures (that is, business investment) will be the next major catalyst to economic and earnings growth.
But since the financial crisis, most companies have deployed excess cash toward building up their balance sheets. And with growth prospects limited, many companies have also opted to return cash to shareholders in the form of buybacks and dividends.
But according to a new survey conducted by BofA Merrill Lynch Global Research, investors would much rather have companies use that cash via capital expenditures (that is, business investment). These expenditures could include the financing of both maintenance and growth projects.
"More than ever, investors are agitating for companies to invest in growth instead of using their cash for buybacks, dividends, or balance sheet repair," said strategist Savita Subramanian. "BofAML's Global Fund Manager Survey suggests that 58% of investors currently prefer capex over other forms of cash deployment - a record high in the history of the survey data (since 2002)."
Bank of America Merrill Lynch Global Research
And it's not just talk.
"As valuations have risen, companies engaging in significant share buybacks have begun to underperform, in stark contrast with the outsized gains we saw during 2012 and most of 2013," noted Subramanian referring to the chart below. "This contrasts with the recent outperformance of companies that are investing in growth."
In other words, investors may be punishing companies for buying back stock.
Bank of America Merrill Lynch
"The market has spoken: NO MORE BUYBACKS," says Subramanian.
Everyone's been writing about capex lately. Perhaps 2014 is when the boom finally happens.