Worldwide quantitative easing may be making investors richer rather than encouraging business investment, according to Citigroup Inc.
Fulfilling the goals of central bankers such as Federal Reserve Chairman Ben S. Bernanke, ultra-low interest rates and bond purchases are encouraging investors to buy stocks. Policy makers’ intent was that asset prices and wealth would rise, encouraging consumers and businesses to spend more.
The sticking point is the particular equities investors are favoring, Robert Buckland, Citigroup’s London-based chief global equity strategist, said in a Nov. 21 report. His research suggests they tend to choose companies that issue dividends and buy back shares rather than those that invest in the economy.
“They’ll take a bigger dividend over a new factory, anytime,” Buckland wrote. “Policy makers may succeed in forcing capital into equities, but from their perspective, it is the wrong kind of capital: income seeking rather than growth seeking.”
U.S. companies spent $650 billion on share buybacks and dividends in 2011, compared with $580 billion for capital spending, the report said. In Europe, Citigroup found, the sectors that spent the most capital were given the lowest stock valuations by investors.
Executives are reacting to the incentives in a bid to encourage stock outperformance, Buckland said. Healthcare companies are cutting back on research, freeing up cash for dividends, for example. Telecommunications businesses now have the highest dividend yield and payout ratio of all sectors.
Buckland also found dividend funds have replaced growth-oriented emerging market funds as the best-selling equity products.
The perverse effects won’t stop policy makers from keeping rates low and eschewing the purchase of riskier assets such as stocks, Buckland said. Of concern, he said, is that governments may use taxes to clamp down on capital returns to shareholders.
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