U.S. companies are sending more money to shareholders than they spend on their own businesses, an “economic distortion” that risks worsening credit quality, says Rick Rieder, chief investment officer of fixed income and fundamental portfolios at BlackRock Inc.
Driven by near-record low interest rates, American companies have embarked on a borrowing binge to fund stock repurchases and dividends, a strategy that has enriched shareholders but is likely to hurt bondholders, Rieder said in a web post. Mounting debts put credit ratings at risk when the Fed raises rates, he said.
“Corporate leaders are incentivized to merely leverage firm capital stacks and avoid riskier capex that may not pay off, particularly as shareholders agitate for a return of cash,” wrote Rieder, who oversees $727 billion at BlackRock. “Should this use of capital crowd out long-term capital expenditure in a firm’s core business, or begin to threaten its credit quality, then it can become concerning.”
Rieder’s comments echo an April letter that BlackRock’s Laurence D. Fink sent to chief executive officers of Standard & Poor’s 500 Index companies. Fink, the CEO and co-founder of New York-based BlackRock, urged executives to focus on long-term growth and avoid giving in to pressure from investors seeking immediate profits, such as buybacks.
More than $2 trillion of stock repurchases since 2009 have fueled one of the strongest rallies of the past 50 years as the S&P 500 surged more than 210 percent. The Bloomberg US Corporate Bond Index is up 32 percent in the past five years.
Companies in the S&P 500 last year spent a combined $890 billion on share buybacks and dividends, compared with $702 billion on capital investment, data compiled by Goldman Sachs Group Inc. show. At the same time, a record $1.7 trillion was raised through corporate bond sales, according to data compiled by Bloomberg.
“In the end, leveraging cycles eventually turn, policy evolves, and the threat of technological and competitive disruption should combine to force companies back to investing in their productive capacity,” Rieder wrote.
“In the meantime, as we wait for the start of rate normalization, firms continue to play capital structure arbitrage, and the cost of waiting to lift off from ‘emergency’ interest rate levels grows,” he wrote.