Nordea On Your Mind: How to spend it

The corporate capex enigma from a new perspective

In several earlier NOYM reports, we examined the anaemic global capex-to-sales trend in 2017-20 and found no compelling justification for it. In addition, we dedicated our 2019 NOYM report 'How to pay it out' to the merits of payouts to shareholders and the choice between dividends and share buybacks. We now combine these two dimensions and take a fresh look at capital spending by large corporates globally. This time, we look at the choices on the one hand between investing in the business or paying out capital to shareholders, and on the other hand at what companies invest in and how capital is paid out. We analyse the split between organic capex, acquisitions and R&D, and we examine the split between dividends and buybacks.

Long-term trend towards more payout

On average, 33% of global total spend in 2000-23 by corporates was payout of dividends and share buybacks. Historically, the share has varied, but it has remained comfortably above this average over the past decade. Payouts are generally higher in North America and the Nordics, and lower in Europe. Over the same period, the average split for payouts was 57% dividends and 43% share buybacks. Here, regional differences are big, with a buyback share of 53% in North America. Europe currently is back to near a historical high share of 34%, while the Nordics prior to the global financial crisis were at higher shares (close to the US) but thereafter stayed within a lower range of 15-20%.

Less capex, more R&D

For the two-thirds not paid out to shareholders, we note a major shift in capital spending since 2000, with a rising share for R&D at the expense of a lower share for organic capex. This is driven by North American large corporates, with the Nordic region on a similar but less pronounced trend and Europe sticking with a different mix of more capex and less R&D. The share of spend on acquisitions varies from year to year but has a fairly stable long-term average of ~16%. With a growing share of economic output represented by new digital products and services, it makes sense for organic capacity investments to lose relative importance over time.

Less volatile capex, M&A and payouts are potential value creation boosters

In the past decade, capex has ceased to be the key driver of revenue growth, which corroborates with the corporate pivot to R&D in the same period. Less volatile capex is rewarded with total shareholder return (TSR) outperformance. We see that M&A boosts both revenue growth and shareholder returns, and the volatility of M&A (a few that are big or many that are small) is not a factor. Companies making the biggest payouts to shareholders have seen superior TSR over time, and even more so if they have been major users of share buybacks.

Corporate views on the use of capital

To get a feel for what companies are actually doing and how they are weighing their choices, we interviewed CFO Cecilia Felton of the global engineering group Sandvik and CFO Oskar Hellström of the aluminium group Gränges.