CEOs should be investing in their businesses today.
There's a lot to be said for certainty -- it is comforting and secure. It would be great if more things in life were certain, like a Caribbean holiday or no wars.
Unfortunately, as the old Benjamin Franklin saying goes, the only two things that are certain are death and taxes and no one particularly looks forward to either of them. Maybe certainty isn't all it's cracked up to be.
We've all come to tolerate an undefined and varying amount of uncertainty in life, but there is a breaking point when too much uncertainty causes us to freeze up and do nothing.
Inactivity is death
I'm currently based in the US and it strikes me that American business is at such a point today. You've no doubt read various gloomy reports about the state of the US economy over the last month or so.
Between the health care overhaul and financial reform, the anticipation of higher taxes, inflation (and deflation) concerns and a lack of hiring, uncertainty looms large here in the States. In fact, in recent weeks, two major US CEOs have expressed their timidity to invest.
Technology giant Intel's CEO recalled better days of America as a great technology laboratory and remarked that the American government had become hostile to business.
Industrial equipment maker Illinois Tool Works' CEO told the Washington Post that obtaining money isn't the problem -- it's the lack of good investment opportunities that's keeping him from investing, saying "I could borrow $2 billion tomorrow for 3.5 percent... but what am I going to do with it?"
This is precisely the type of attitude that is holding back the American economic recovery. If the CEO of an S&P 500 company can't find a way to earn more than 3.5 percent (even less after the tax benefits of debt are considered) on a domestic capital investment, then we're in big trouble.
A lack of vision
On the other hand, a lack of corporate investment isn't anything new during a recession.
A Goldman Sachs chart that shows S&P 500 companies' capital expenditure growth trends over the past twenty five years versus sales growth reveals a curious pattern -- aggregate investment tends to ramp up only after sales growth has resumed for a few quarters and falls only after sales have declined for a few quarters.
In other words, investment is high when the economy is booming and things appear certain, but slows down dramatically during a recession and uncertainty reigns.
In investing parlance we call that behaviour "buying high" and that's never been a good way to make money.
So whilst I admire Intel's and Illinois Tool Works' businesses, I'm more drawn to shares of American companies that are actually putting money to work in these uncertain times because they'll be the ones that will likely benefit the most once the economy recovers.
Here are five large-cap names that have been doing just that since the recession began:
| Company | Market Cap
($bn) | Two-year
annualised
capital
expenditure
growth |
|---|
| Exxon Mobil | 310 | 16.8% |
| Apple | 229 | 38.1% |
| Hewlett-Packard | 90 | 17.7% |
| Walt Disney | 64 | 12.6% |
| Amazon.com | 59 | 45.5% |
*Data provided by CapitalIQ, as of 2 September
Time will tell if these companies' investments were wise moves, but putting money to work when others are backing down certainly increases their chances for success.
Foolish bottom line
There's no question that we live in economically uncertain times, especially in the developed world, but it's also imperative that we remain confident that, as Little Orphan Annie sang, "The sun will come out tomorrow."
Times will get better again and it'll be those companies that remain confident and invest in this environment that will be better able to fuel growth for years to come. I'm certain of it.
More from Todd Wenning:
> Todd does not own shares of any company mentioned.
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