While Corporate America has thrown more money into dividends and stock buybacks, many companies have continued to invest, bolstering the outlook for a recently launched capital expenditure-themed exchange traded fund.
Investors who want to target U.S. companies that allocate more toward capital expenditures may take a look at the relatively new Elkhorn S&P 500 Capital Expenditures Portfolio (NasdaqGM: CAPX), which targets those companies that are diligently reinvesting in their businesses to increase market share and competitive moat. Specifically, CAPX takes the top 100 S&P 500 companies based on efficient capital expenditure as a way to track U.S. firms that have reinvested their money toward meaningful growth and innovation. The ETF was launched at the end of May. [An ETF to Target Companies with Higher Capital Expenditures]
Companies are still expanding their operations and investing at a rate above depreciation or at least maintaining net asset base, writes Dominic Rossi, global chief investment officer of equities at Fidelity, for Financial Times.
If companies are not putting enough money back into expanding operations, people may see that capital expenditure is trending below depreciation.
“A company failing to invest at a rate that at least maintains its net asset base can be justifiably criticized for over-earning today, while sacrificing its future,” Rossi said. “However, if capital expenditure runs consistently above depreciation, the claim could not be true, regardless of its dividend or share buyback policy.”
Currently, in the U.S., the capex to depreciation ratio is 1.2 times, so U.S. companies are reinvesting $1.20 for every $1 of depreciation in their net asset base.
“We consider this to be a healthy level of reinvestment, capable of sustaining earnings growth in future years,” Rossi said.
Despite the growth in dividends and share buybacks, companies are still investing with the future in mind, carefully balancing capital expenditure with dividend and buybacks as return on equity rises and profit margins widen to historically high levels.
“We do not see a trade-off between investment and dividends as others do,” Rossi added. “On the contrary, we are living in an era during which the division of income favors capital over labor, allowing companies to both invest and reward shareholders.”
For instance, CAPX, which focuses on companies that invest, also includes many component holdings that have maintained some level of dividend and share buyback programs, such as Gilead Sciences (NasdaqGS: GILD) at 1.2% of the ETF’s overall portfolio, Morgan Stanley (NYSE: MS) at 1.2%, Goldman Sachs (NYSE: GS) at 1.2% and Clorox (NYSE: CLX) at 1.0%.
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.