By Natsuko Waki
LONDON (Reuters) - A growing trend for companies to return some of their huge cash piles to shareholders rather than using the money to expand their businesses could spell trouble for the global economy.
Their reluctance to invest - which hasn't affected profits in recent years, breaking a historic link - reflects a lack of confidence in future demand for their products and suggests sustainable private sector-driven growth is still some way off.
It chimes with a preference among investors for income-bearing stocks and bonds over securities whose returns are tied to future economic performance, indicating they also expect the world economy to remain reliant on central bank support.
Thomson Reuters data shows companies worldwide hold $6.7 trillion of cash and equivalents on their balance sheets, more than double the amount a decade ago. U.S. and European companies account for nearly two thirds of the total. (https://bsmedia.business-standard.comlink.reuters.com/zat87t)
But this cash buffer - which incoming Bank of England Governor Mark Carney has called "dead money" - is coming back to the market in the form of share buybacks or dividend payouts, rather than capital spending or mergers and acquisitions.
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Globally, share buybacks jumped to $168 billion in the first quarter from $100 billion in the final three months of 2012, according to JP Morgan data. The value of buybacks for the first four months is 50 percent higher than a year ago, with estimates for the whole year standing at $590 billion.
In the short term, buybacks and dividend payments will certainly please investment funds desperate for income in a world of low yields depressed by central bank money-printing.
But there is a downside.
"What companies are trying to do is keep profits as high as possible by cutting costs, and boost earnings by returning cash to shareholders. That can help for some time, may boost earnings for 1-2 years but won't for (the) long-term," said Philipp Bartschi, chairman of the investment committee at Bank Sarasin.
"If you are always returning cash, you will destroy yourself at the end. If no one is investing, productivity is slowing. You are probably slowing your earnings growth in the medium term."
SLOW CAPEX
Capital spending has been slow to pick up following the 2008 financial crisis and recessions that followed around the world.
According to Bank of America Merrill Lynch, investment as a share of GDP has fallen to 13 percent in the United States from 17 percent in 2007 and to 18 percent in Europe from 23 percent. In absolute terms, European capex is at its lowest since 1999.
Political hurdles already hinder investment for utilities, transport and telecoms, which are the top cash hoarders in Europe. Investment by energy or materials firms is likely to take place in the emerging economies, not those in the developed world which are in most need of a boost.
"There is ongoing austerity, pressure on cash flows and a profound lack of confidence. Given this (companies) are likely to remain cautious with capital expenditures," said Gareth Williams, sector economist at Standard & Poor's. "Returning cash to shareholders is an easier choice because it keeps investors happy and you don't have to justify the risks of investment."
Many companies rode out the financial crisis by cutting costs, delaying investment and repairing balance sheets, and some now boast better credit ratings than their home countries.
Returning cash to shareholders is not seen as risky but it does suggest firms may be starting to re-gear balance sheets.
UNSUSTAINABLE TREND
One phenomenon is that a strong historic relationship between investment and corporate profits is breaking down (http://link.reuters.com/nev87t).
Between 1929 and 1986, capital investment and profits had a correlation of 0.75. Between 1987 and 1999 this eased to 0.43, but in the past 12 years the relationship has actually reversed to -0.48, according to data from U.S. money manager GMO.
This means companies have increased profits while their capital investment has been falling - largely because of higher government spending to support the economy at a time when households, another engine for profits, are deleveraging.
But as governments tighten their belts, profits are likely to fall - which may spur firms to resume investment.
"Corporations are making plenty of money - profits are just off their all-time high relative to GDP - but investing less than at any point since the Great Depression," Ben Inker, GMO's co-head of asset allocation, said in a note to clients.
"Can profits stay high forever? They could, but there would be implications that might not be sustainable."
(Editing by Catherine Evans)