Made stingy by the pandemic and gun-shy by the election, U.S. companies have reconsidered spending plans on everything from shareholders to factories. As a result, cash is pooling on balance sheets, swelling rainy day funds to an unprecedented $2 trillion.
While analysts have a million ways to spend it, the market’s preference is clear: don’t. Doing so has been bad for your stock. Companies laying out the most for share repurchases and capital investments have trailed the S&P 500 since its March low, according to data compiled by Goldman Sachs Group Inc. and Bloomberg. Over that stretch, firms with sturdier finances beat weaker ones by almost 20 percentage points.
It’s concerning when cash sits idle, particularly when the U.S. is trying to pull out of a recession at a time when uncertainties around vaccines and who will be president remain high. With a new fiscal package stalled in Congress and the election race getting chaotic, the effect of tighter purse strings in Corporate America has the potential to go beyond markets and become an economic story, too.
“In an environment where things are changing and markets are changing, it may be better to wait and see how things adjust first,” said Katy Kaminski, chief research strategist and portfolio manager for AlphaSimplex Group. “It’s less clear what the opportunities are.”
A Goldman Sachs basket of big spenders on capex has fallen almost 7% this year versus a gain of similar size for the S&P 500. The basket, which strips out sector weightings to make sure no industry dominates, includes Western Digital Corp., down 38% in 2020, AT&T Inc., down 22%, and Merck & Co., off by 9%. The firm’s cash-return basket, including Altria Group Inc. and Booking Holdings Inc., has lost 1.5%.
Reluctance to put money to work took hold when the pandemic struck and has shown few signs of easing. Companies in the S&P 500 slashed share repurchases by 46% during the second quarter to an eight-year low while their capital spending dropped 15%, data compiled by S&P Dow Jones Indices and Barclays showed. Paired with a rush to raise money in markets amid the worst profit contraction since the global financial crisis, it’s meant cash has piled up.
Anemic corporate spending is potentially self-fulfilling when it comes to the impact on growth. With the economy sluggish, companies are reluctant to deploy cash, starving the economy of much-needed fuel. Add to that virus cases spiking in many areas and blue-chip companies announcing tens of thousands of layoffs.
“If we had more clarity that we would have a sustained fiscal cushion and that things were going to start to stabilize longer-term, I think it would be very reasonable for companies to start looking for productive usage for that cash,” said George Pearkes, Bespoke Investment Group’s global macro strategist. “But, if I’m a management team right now, why would I get rid of cash when I’m seeing the economic data that I’m seeing?”
An analysis by Barclays strategists led by Shobhit Gupta and Maneesh Deshpande _ which sifted through corporate earnings calls and accounted for leading economic indicators _ showed a muted rebound for such expenditures for the next three quarters.
Some opportunities to spend cash proved brief. The March selloff was swift and so was the rebound, giving deal-makers little time to do takeovers. Outside the pharmaceutical and technology industries, activity remains muted. Announced mergers and acquisitions totaled $2.1 trillion during the first nine months, 22% lower than the same period a year ago, data compiled by Bloomberg show.
Now, with the S&P 500’s price-earnings ratio elevated to around levels seen almost two decades ago, takeovers don’t look like a smart use of cash. Neither do share buybacks, something that has been frequently criticized by politicians for enriching the wealthy. It’s another conundrum business leaders face when millions are out of jobs.
“The pandemic-triggered buying opportunities didn’t last long enough to stimulate an M&A boom,” said Ed Yardeni, president of Yardeni Research. Buybacks are “busted for now,” he added.