Last July, Reserve Bank of Australia Governor Glenn Stevens famously lamented the subdued "animal spirits" in both Australia and the global economy. In using that term, the central bank chief was referring to the sort of risk-taking that leads to the deployment of capital in pursuit of growth.
This lack of entrepreneurialism is most evident in the fact that in recent years Australian companies have increasingly chosen to return capital to shareholders rather than reinvest it in their own companies.
While fat dividends are certainly one of the main enticements of investing in Australian stocks, in the medium to long term they become less compelling if they're impinging on a company's ability to fund its own growth, the lack of which could undermine the dividend itself and ultimately the share price.
As income investors, we don't just want a substantial payout, we want a substantial payout that grows over time. And that can't happen without organic growth.
According to estimates by the Australian government, total private capital spending is expected to fall by 10 percent, to AUD145.2 billion, over the 12-month period ending in June 2015.
Although Australia's central bank would like the non-mining sectors to taker over leadership of the economy, they've yet to start spending on the growth that will get them there.
When excluding the contribution from mining, Australia's private sector spent about AUD68 billion on organic growth over the trailing year that ended last June. As Bloomberg noted, that was the lowest level of spending since prior to the Global Financial Crisis, even though the economy is now 20 percent larger than it was then.
In fact, if current trends among companies listed on the S&P/ASX 200 are sustained over the next two years, total dividend payouts will outpace capital spending by fiscal-year 2016, according to analyst estimates compiled by Bloomberg.
Of course, real life doesn't adhere to financial models. And while the so-called animal spirits have yet to be revived, there are signs of cautious optimism among businesses.
Even though Australia's domestic economy was relatively unscathed by the Global Financial Crisis (GFC)--despite recent sluggishness, it's been over 23 years since the country last experienced a recession--that doesn't mean the experience wasn't psychologically damaging.
After all, Australian companies don't operate in a vacuum, they do business all over the world. And while the country's economy held together during that tumultuous period, its stock market dropped just as hard as its developed-world peers.
But enough time has passed that wounded psyches are finally starting to heal.
As a new report from Boston Consulting Group observes, "Five years on from the GFC, many Australian companies are rethinking their strategies, shifting from restructuring and consolidation to growth. Improvements in asset productivity, aggressive cost reduction and smarter sourcing have helped companies improve their profits to pre-crisis levels, providing them with excess cash."
Finally flush with cash, management teams must renew their attention to how they allocate capital. And according to a new survey conducted by the Commonwealth Bank of Australia, businesses are indeed starting to contemplate investing for growth again.
The bank's latest Future Business Index, which is based on a survey of 424 public and private firms with annual sales ranging from AUD10 million to AUD100 million, shows that one in two businesses plan to prioritize growth over cost cuts over the next six months. The bank says that's the first time the survey has showed such a result in the three years since it began.
Now, we'll have to see whether such intentions lead to actual investment.
This article originally appeared in the Down Under Digest column. Never miss an issue. Sign up to receive Down Under Digest by email.
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