Nordea On Your Mind: How to spend it
Our desk interprets a recent report by Nordea on corporate capital spending trends, emphasizing a growing preference for shareholder payouts over capital investments. The note reveals that corporate payouts have averaged 33% of global total spend from 2000-2023, with notable regional differences, particularly higher in North America at 57%. This shift towards increased payouts and R&D spending could influence currency movements as market participants recalibrate expectations on corporate behavior and growth prospects. Per the full note , this shift suggests a persistent value creation strategy prioritizing shareholder returns may continue to impact markets moving forward.
What the desk is arguing
The desk posits that the increasing trend of corporate payouts over capital expenditure could reshape market dynamics. Per the full note , Nordea highlights a long-term upward trend in payouts, specifically in regions like North America where buybacks comprise more than half of total shareholder returns.
The report notes that from 2000-2023, companies allocated 33% of their spend towards shareholder payouts, a figure that indicates a strong preference for immediate returns over potential long-term growth. The increasing focus on R&D spending also emerges as a critical factor that could drive future innovation and corporate value creation.
Where it sits in our coverage
Our current consensus target for the relevant currency pair stands at 1.075, with a range projected between 1.04 and 1.12. Firms that support this view include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's interpretation aligns closely with jpmorgan, which anticipates a stronger performance corresponding with consumer sentiment and corporate payouts, while positioning could diverge from bofa's more conservative outlook.
How other firms see it
Firms that concur with the desk's position, such as jpmorgan, are focusing on the implications of elevated shareholder returns. Conversely, bofa presents a more cautious perspective, concerned the trend could stall growth if companies neglect capital investment.
Market participants should monitor related currency pairs and economic indicators, such as corporate earnings announcements and central bank guidance that reflect overall investment sentiment impacting foreign exchange dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Corporate payouts averaged 33% of total spend from 2000-2023, revealing a shift toward shareholder returns.
- 02Nordea identifies a regional split in payout strategies, with North America leaning heavily towards buybacks.
- 03The focus on R&D spending indicates potential for future growth despite immediate cash return preferences.
- 04Market dynamics may shift as corporations balance between investment and shareholder distributions.
Market implications
Traders should watch for market reactions around corporate earnings releases, as these could signal trends in the ongoing corporate capital allocation strategies. The convergence of payouts and R&D commitments could sway investor sentiment, influencing pricing in the relevant currency pairs.
Risks to this view
A reversal of the call could occur if we see an unexpected uptick in capital investment over payouts, particularly if global economic conditions improve. Additionally, any significant policy shifts by central banks that emphasize growth could undermine the current emphasis on shareholder distributions.
Nordea On Your Mind Nordea On Your Mind: How to spend it 16-04-2024 What drives corporate spending? Our Nordea On Your Mind team delves into corporate capital spending trends and the balance between business investment and shareholder rewards. Discover the shift towards more payouts and increased R&D spending, and uncover the potential value creation boosters found in less volatile capex and ambitious payouts.
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%. Top 20% buyback spenders versus top 20% dividend spenders: cumulative relative performance Source: Factset, Refinitv and Nordea estimates Global corporate spending split Source: Factset & Nordea 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. About Nordea On Your Mind Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients.
The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance. Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients.
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