Morgan Stanley research report consisting of 23 pages discussing capital allocation. See page 9 discussing buybacks.
Summary:
In the article “Cost of Capital and Capital Allocation,” Morgan Stanley examines how U.S. public companies responded during the “easy money” period from 2009 to 2021, characterized by low interest rates and abundant capital. The analysis reveals that, contrary to theoretical expectations, companies did not significantly increase investments or leverage. Instead, they often allocated capital to share buybacks, even when their internal hurdle rates exceeded their weighted average cost of capital (WACC). This behavior suggests a preference for returning capital to shareholders over pursuing potentially value-creating investments.
The article also notes that share buybacks are likely to contribute less to earnings per share (EPS) growth in the current environment, given today’s valuation multiples and interest rates. This indicates that the effectiveness of buybacks in enhancing shareholder value may be diminished compared to the “easy money” period.
In summary, Morgan Stanley’s analysis highlights a disconnect between theoretical capital allocation principles and the actual practices of U.S. public companies during the “easy money” era, emphasizing a tendency to prioritize shareholder returns through buybacks over investments that could potentially offer higher returns.
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