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With
low interest rates and limited demand for companies' products,
it seems unlikely investors would prefer executives to
reallocate capital to expand their businesses, based on comments
from several speakers at the 2015 Reuters Wealth Summit in New
York this week.
"The tough challenge that they face is there's this excess
capacity" that makes it unclear how firms could find better ways
to spend their money, said Michael Weinberg, chief investment
strategist of Protege Partners, a New York investment company
that puts money into hedge funds.
Peter Charrington, global head of Citigroup Inc's private bank,
said companies with significant share buybacks or paying out
strong dividends are attractive for his investors.
"In an environment of very low interest rates, where we are
today, our clients have looked for yield," Charrington said at
the summit.
Companies in the S&P 500 index spent $566 billion buying back
their shares in 2014, up from $480 billion in 2013 and the
highest amount since 2007, according to FactSet. Many of the
buybacks were in response to pressure from activist investors,
and came despite record equity prices making the buybacks more
expensive.
The pace of buybacks has sparked concerns from leaders of some
top public pension funds that companies might do better by
putting more of the money into their businesses, such as by
hiring workers or building new plants.
"I don't think the best return on capital is just reducing your
share count," said James Swanson, chief investment strategist
for MFS Investment Management, in a telephone interview this
week. On the other hand, companies mostly are using their own
free cash flow for the buybacks, sustaining the pace.
"One thing that would alarm the market would be if they started
borrowing to buy back shares," Swanson said.
So far, few wealthy investors seem focused on the debate over
buybacks, however, based on comments at this week's summit.
"I don't think most of our investors think about that," said
John Thiel, head of Merrill Lynch Wealth Management, a Bank of
America unit.
Follow Reuters Summits on Twitter: @Reuters_Summits
(Editing by Jonathan Oatis)
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