CS Credit Suisse Group

7.4%

Combined capital spending and R&D expenditures as a share of sales at U.S. companies

U.S. corporations are looking for better places to invest their money other than plants, equipment, research or development.

Combined capital expenditures and R&D were 7.4% of sales at more than 1,800 U.S. companies in 2015, according to data from Credit Suisse Group AG. That is above the 6.4% nadir the companies spent in 2010, but far below the 9.3% peak the companies clocked in 1991.

The ratio of combined capex and R&D for a comparable universe of 815 Eurozone companies was 7.0% in 2015, down from 11.9% at its peak in 2000. Last year was the first time the European companies spent a lower percentage of their sales on capex and R&D than did their U.S. counterparts. Both U.S. and European groups exclude financial companies and utilities.

"It does seem to suggest a lack of investment in future growth," said Rick Faery, global head of Credit Suisse's Holt Corporate Advisory unit. "There has been a swing from investment in capex and R&D and toward dividend increases and buybacks."

A combination of factors are likely at work. First, there is the tepid macroeconomic outlook, especially since the financial crisis. "There are low growth expectations everywhere," said Tommy Mercein, Credit Suisse's global head of debt capital markets. "Revenue growth will be slow. The yield curve around the world reflects that."

There is also the growth of service industries and other asset-light businesses. "There are a lot more companies that are making investments in ideas rather than widgets," said Mr. Faery. Think Twitter Inc. rather than General Motors Co.

Lastly, as interest rates have declined over the years, so too has the weighted average cost of capital. That means companies could probably earn a satisfactory return on the capital they spend and R&D, if they would lower the hurdle rates they set for such investment.

Mr. Faery said they probably haven't done so. "Companies are very secretive and protective about those," he said. "Most companies have not changed those hurdles in years and in some cases decades."

--Richard Teitelbaum

(END) Dow Jones Newswires

July 26, 2016 02:49 ET (06:49 GMT)

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