America’s CEOs Prefer Paying Dividends to Paying Down Debt

(Bloomberg) -- So much for deleveraging.

Returning money to shareholders through dividends and share buybacks is the top priority for U.S. executives surveyed by UBS Group AG, even as they expect a sharp decrease in revenue growth.

Decision makers are prioritizing paying shareholders over improving balance sheets, hiring, capital expenditures, and merger and acquisition activity, the UBS survey of 450 senior executives from public and private firms of all sizes found. The survey was conducted in late May.

Since the Federal Reserve opened up the liquidity spigots with its corporate bond buying facilities, America’s blue-chip companies have rushed to issue bonds at attractive rates even though they’ve never been so indebted by at least one measure. Reducing debt levels, which many companies said they would do before the pandemic began, appears to now be an afterthought.

“Over the last decade, there’s been a number of narratives that I think have attempted to be told around firms deleveraging and doing the right thing,” Matthew Mish, head of credit strategy at UBS, said in an interview on Thursday.

“The reality is, we’ve seen debt go up substantially, and we’ve seen leverage generally rise. Companies, with the blessing of the agencies, have taken low rates and open markets to add more debt.”

More Borrowing

The Fed said on Thursday it was capping bank dividends at second-quarter levels and would limit future payouts based on a formula linked to recent earnings. Banks can’t increase dividends or end a buyback freeze through at least the third quarter.

Still, corporate executives in the survey expect even more borrowing demand over the next 12 months, largely driven by public policy that’s accommodative to adding debt -- making deleveraging look unlikely, UBS strategists led by Mish wrote in a report on the findings.

Read more: Fear is all but dead in credit markets backed by Fed

While the highest-rated borrowers who had strong balance sheets coming into the recent crisis are likely to be fine, Mish said, the consequences of higher debt levels are likely to be more severe for small and middle-market companies.

“The future business outlook for small firms remains severely challenged,” the strategists wrote. A net 28% of executives surveyed at smaller firms now expect revenue to fall this year, a shift from net 28% anticipating higher revenue before the pandemic. That means near-term liquidity issues, which the Fed has largely helped solve through bond buying facilities and its Paycheck Protection Program loans, could become solvency issues for smaller firms.

The survey found “limited evidence” that lending standards have tightened, despite small and middle-market executives being much more pessimistic about their outlook.

But for many of the larger firms, the survey indicates it’s back to business as usual just a few months after panic over the pandemic froze credit markets.

“At least for those that are winners -- companies that have been less affected and have strong balance sheets -- our survey indicates that it’s back to more of the same, which is buybacks and dividends,” Mish said.

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