In 2000, Wal-Mart Stores, Inc. (NYSE:WMT) generated $8.2 billion in cash from operations, $6.2 billion (75%) of which went into capital expenditures, like investing in new stores. A far smaller share — about $1 billion — was returned to shareholders in the form of dividends and share buybacks. Investing in the future far outweighed rewarding investors today .
In 2012, the tables flipped. Wal-Mart Stores, Inc. (NYSE:WMT) generated $25.6 billion in cash from operations and spent $12.9 billion — or 50% — on capital expenditures. Another $13 billion was distributed to shareholders in dividends and buybacks. Investing in the future and rewarding shareholders today took equal precedence.
Part of this shift is Wal-Mart Stores, Inc. (NYSE:WMT) maturing from a growth company into a stalwart. But it’s actually indicative of how most of corporate America has changed over the last decade. Goldman Sachs recently published a report showing how S&P 500 have spent their cash on over the last 15 years. I’ve recreated it here:
A few trends stick out:
Buybacks are up.
Dividends are up.
Capital expenditures are down.
Part of this is because of a weak economy. No business will invest in a new shoe factory if consumers don’t have enough income to buy more shoes. And given America’s demographic headaches, businesses would have fewer investment opportunities today compared with a decade ago even if the economy were strong.
Though it’s harder to prove, part of this is likely a shift toward short-term thinking among corporate executives. Henry Blodget of Business Insider wrote this weekend:
The way most companies do business is to focus primarily on today’s bottom line: The prevailing ethos in corporate America, after all, is that companies exist to make money for their owners — and the more and the sooner the better — so every decision should be made in the context of that.
The result of this is that many (most?) companies scrimp on things like long-term investments, customer service, product quality, and employee compensation, in the interest of delivering a few more pennies to this quarter’s bottom line.
Now, corporations may act this way for rational reasons. Most professional investors are judged by short-term performance. Rare is the fund manager who can truly reach for superior long-term investment results; investors give up on managers who suffer a down year, or even a bad quarter. They need companies to produce returns today, even if it comes at the expense of higher returns tomorrow.