Founder’s Edition, by Joseph Neu
Perennial discussions of capital allocation tend to end up in essentially the same place.
My friend Tom Joyce at Deutsche Bank circulated the chart below last week in his “Chart of the Day” email. This one caught my eye because it shows how corporate uses of capital, at least at the S&P 500-company level, are pretty consistent year to year.
- M&A and Buybacks. Tom calls out the changes: “During the current M&A upcycle, which began in late 2014, M&A has risen as a percentage of total corporate capital allocation. Since the passage of US tax reform in December 2017, incremental earnings benefits have been disproportionately allocated toward stock buybacks.”
- Marginal differences. Still, should we get that excited about sub-5% average increase in share buybacks? A one year 10% increase in M&A capital allocations?
It seems to me like there’s not much innovation going on with capital allocation decisions. Set your capex need based on where your products are in their life cycle, opportunistically look at liability management, set aside for anticipated M&A and then debate the merits of dividends vs. buybacks in line with your capital return guidance. Essentially a monkey could do it.
Yet, capital allocation is a perennial top project and topic for treasurers in our network. I hate to guess how many hours are spent deliberating and supporting capital allocation decisions with analysis.
- Thought bubble. What would an AI come up with if it were tasked to optimize the allocation of corporate capital? Especially if it were not constrained with all the commonly held conventions and assumptions about how it is being done now?
If anyone has let an algo or AI loose on their capital allocation, real or hypothetical, I would love to know what that looked like. Or if you are aware of research or solutions in this area, please ping me to connect.
Capital allocation is already on the agenda for at least one of our upcoming treasurer meetings. I’d enjoy shaking up the discussion with something new and relish getting into the weeds on dividends vs. buybacks and the rest, but not if the discussions always lead people back to the same place.