Credit Suisse said there is little evidence to suggest companies growing capex can improve future returns.
Analysing capex data and shareholder returns from 1989 onwards for the current constituents of the ASX 200 shows the strategy of buying the bottom third of capex-to-sales companies and selling the top third outperforms by 830 basis points over 25 years.
Credit Suisse said capex-heavy companies spent two to three times more than ‘capex-lite’ firms.
“We calculate that $100 invested in 1989 in the capex-lite third of our universe of stocks, re-weighted each year, would now be worth $6,100,” said Credit Suisse.
“Meanwhile, $100 invested in the capex-heavy third will be worth just $900.”
This performance has only accelerated in the past 15 years following the telecommunications, media and technology crash, according to Credit Suisse.
“Perhaps the combination of structurally lower interest rates and the horrendous value destruction during the great bull market made investors much more willing to reward capex-lite companies and penalise those that are capex-heavy,” said Credit Suisse.
“No doubt a reason why capex-heavy companies are such poor investments is because they have a terrible history of generating an adequate return on invested capital.”
According to the Credit Suisse analysis, the only period in the 25 years where capex-lite companies generated a weaker average return on invested capital than capex-heavy companies was in the early 1990s.
The firm said it expects little recovery in capex ahead, which is likely to “impede economic transition, keep interest rates and the cost of debt lower for longer”.
“It all suggests that the economic transition in Australia, still in its infancy, is not going to be as smooth as some hope,” said Credit Suisse.
“Against a sluggish economic backdrop, investors should seek out those companies growing, but with conservative capex budgets.”
