In 2000, Wal-Mart (NYSE:WMT) generated $8.2 billion in cash from operations, $6.2 billion (75%) of which went into capital expenditures, like investing in new stores. A far smaller share -- about $1 billion -- was returned to shareholders in the form of dividends and share buybacks. Investing in the future far outweighed rewarding investors today .
In 2012, the tables flipped. Wal-Mart generated $25.6 billion in cash from operations and spent $12.9 billion -- or 50% -- on capital expenditures. Another $13 billion was distributed to shareholders in dividends and buybacks. Investing in the future and rewarding shareholders today took equal precedence.
Part of this shift is Wal-Mart maturing from a growth company into a stalwart. But it's actually indicative of how most of corporate America has changed over the last decade. Goldman Sachs recently published a report showing how S&P 500 (SNPINDEX:^GSPC) companies have spent their cash over the last 15 years. I've recreated it here:
A few trends stick out:
- Buybacks are up.
- Dividends are up.
- Capital expenditures are down.
Part of this is because of a weak economy. No business will invest in a new shoe factory if consumers don't have enough income to buy more shoes. And given America's demographic headaches, businesses would have fewer investment opportunities today compared with a decade ago even if the economy were strong.
Though it's harder to prove, part of this is likely a shift toward short-term thinking among corporate executives. Henry Blodget of Business Insider wrote this weekend:
The way most companies do business is to focus primarily on today's bottom line: The prevailing ethos in corporate America, after all, is that companies exist to make money for their owners -- and the more and the sooner the better -- so every decision should be made in the context of that.
The result of this is that many (most?) companies scrimp on things like long-term investments, customer service, product quality, and employee compensation, in the interest of delivering a few more pennies to this quarter's bottom line.
Now, corporations may act this way for rational reasons. Most professional investors are judged by short-term performance. Rare is the fund manager who can truly reach for superior long-term investment results; investors give up on managers who suffer a down year, or even a bad quarter. They need companies to produce returns today, even if it comes at the expense of higher returns tomorrow.
There are exceptions, of course. Amazon (NASDAQ:AMZN) in recent years has pumped nearly all of its effort into investing in future, profits today be damned. "Amazon, as far as I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers," wrote Matthew Yglesias last year.
But as CEO Jeff Bezos wrote in a letter to shareholders:
Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general strike some as too generous, shareholder indifferent, or even at odds with being a for-profit company ...
But I don't think so.
To me, trying to dole out improvements in a just-in-time fashion would be too clever by half. It would be risky in a world as fast-moving as the one we all live in.
More fundamentally, I think long-term thinking squares the circle. Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.
The irony here is that Amazon has produced greater short-term shareholder returns than the vast majority of companies, up 280% in the last five years. "Take a long-term view, and the interests of customers and shareholders align." Wise words more CEOs may want to consider.