Capital spending has been disappointing during the current U.S. economic expansion. Ed Yardeni, of Yardeni Research, put some numbers on it in a note on Wednesday: Since the cycle trough in 2009, capital spending has gained just 20.6 per cent – the second slowest pace of the past six previous upturns going back to 1961.
The average capital spending increase during expansions is 29.6 per cent, as companies upgraded their operations – from new trucks and buildings, to new technology and equipment – in anticipation of rising consumer demand.
Tech spending really stands out this time, in a bad way. Spending on information processing equipment is up 25.1 per cent, versus 71.9 per cent on average, according to Mr. Yardeni. And spending on software is up 18.2 per cent versus 66.4 per cent on average.
"The last two categories have experienced the weakest spending this recovery of all the measured periods," he said in his note. "My hunch is that the Cloud has radically increased the productivity (bang per buck) of technology. In other words, less is more: Less IT hardware and software can do much more than in the past."
This fits in nicely with the rise in corporate cash levels, which have hit record highs among U.S. companies. Instead of spending cash, companies are preserving it in anticipation of tough times ahead, drawing flack from some politicians and central bankers for not doing their part to stimulate the economy.
However, at least companies have been treating shareholders well, with rising dividends and share buyback activity. According to Standard & Poor's, U.S. companies raised their dividends by a net $14.5-billion (U.S.) in the first quarter of 2013. The number of dividend-raisers increased by more than 39 per cent over the first quarter of 2012.
There should be more increases ahead, given that the average payout ratio is just 36 per cent, much lower than the historical average of 52 per cent.
At the same time, the total value of share buybacks hit $100-billion in the first quarter.
But the sluggish pace of capital spending also has implications for stocks that are commonly tied to corporate retooling. Here, investors are now taking a cautious approach over whether spending will ever pick up, making it a tempting place to look for potential overlooked bargains.
For example, Oracle Corp.'s share price is at the same level today as it was in 2011, meaning that it hasn't delivered anything in about two-and-a-half years. The stock trades at just 11.6-times estimated earnings.
Caterpillar Inc. trades at 13.6-times earnings. The share price is back to levels seen in late 2010 and is down 25 per cent from a recent high in 2012 – although the story is complicated by the company's exposure to the Chinese economy.
Perhaps capital spending will stay in the doldrums for some time. But if it picks up, these stocks will be among the winners.
David Berman