Bank of America Suggests Investment Growth As More Important Than Buybacks
Charlotte-based bank and financial services company believes investment in new factories and products can boost stock price.
Bank Of America Corp (NYSE:BAC), on Wednesday, has suggested to companies, big and small, as well as industrial conglomerates, that they should consider focusing on investment in the development of new factories and innovative products to boost their stock price, instead of looking to share buybacks to try and boost their stock price.
The bank and financial holding company’s strategist and research analysts, who cover all aspects of the global economy, along with markets ranging from commodities and money, made those remarks as the bank issued its semiannual update of the domestic and global economy as a whole. Despite of many diverse views, they appeared to be on the same page: share buybacks are no longer producing excessive rate of returns.
Instead, researchers and analysts have suggested to companies to go for investment in the capital expenditures on projects, ranging from factories to new product development. It may be deemed a priority as Capex spending has lagged for many years and many industrial equipment assets owned by many industrial companies are in need of an upgrade.
Share buybacks have faced a lot of opposition from critics for a long time. They contend that it only provides a temporary boost to the returns but masks the problem that companies are not trying to prove themselves competitive enough. Therefore, businesses should go all the way in investing in their capital equipment’s, as well as on their human resource, in order to provide a meaningful rate of returns for the money’s worth, though that would not happen for a few years till the investment is made.
Savita Subramanian, Bank of America head of U.S. Equity and Quantitative Strategy, threw caution to the wind, and stated that this strategy should not be taken as a ‘one size that fits all strategy’. Capex can be termed as risky to manage firms and that failure to manage them to deliver the desired results can lead to damaging effects to the company. This is the reason that companies, for the most part, go for buybacks that are perceived to be less risky.
While that perception is true to an extent that buybacks bolster returns more, companies that also go for capital investment demonstrates a true commitment for growth in the long-run.
Bank of America stock price ended the day at $17.49; a massive decline of more than 1%, despite it announced plans to buy back $4 billion worth of shares.
