Businesses that are run to maximise the value delivered to shareholders, without attention to reinvestment, are called “cash cows” – they are milked for money. The metaphor does not bear scrutiny, however: the dairy cow is fed daily to keep the milk flowing. When the extraction of cash takes a permanent priority over investment, a company is not being milked. It is being killed for its meat.
That metaphor is not perfect either. The slaughter of an animal is quick; the flesh can be stripped from a company slowly. But the decline in private investment relative to output in the developed world makes one wonder if many companies are not being eaten up, a nibble at a time.
Consider the 2014 targets from the industrial conglomerate 3M, released on Tuesday. The company hopes for organic sales growth between 3 and 6 per cent, and double-digit earnings per share growth. Not bad; but the striking thing is that 3M is going to increase its dividend a heroic 35 per cent. The dividend has risen, on average, 5 per cent a year since 2008. And 3M plans to spend about $20bn on share buybacks in the five years up to 2017, while $7bn was spent in the previous five.
Is 3M milking the cow, or eating it? It is making significant investments, too: it expects capital expenditure to grow at about 6 per cent annually through 2017 – slower than earnings growth, but hardly stagnant. Research and development expenses as a percentage of sales are expected to be steady or a shade higher. There is no question, however, that the amount of cash flowing to investors is growing faster than the amount of cash flowing back into the company.
This is only a mistake if 3M is forgoing investment opportunities that would ultimately outweigh the cash returns. If there is a dearth of long-term investment opportunities, though, cash returns may not be enough to support share prices.
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