jueves, 23 de abril de 2015

jueves, abril 23, 2015

Corporate America’s Millstone of Too Much Cash

Tony Sagami

April 21, 2015


Corporate America is flush with cash. Amazing amounts of cash.

According to research house FactSet, the combined cash balances of just the 500 companies in the S&P 500 is sitting at a record $1.4 trillion.


 
That’s a mountain of cash, but here’s some perspective on just how much money we’re talking about. $1.4 trillion is enough money to buy all the shares of Berkshire Hathaway… and Facebook… and Apple… and still have money left over.

That amount increases to almost $2 trillion if you expand the universe to include all publicly traded stocks.


 
A publicly traded company has five options when it comes to deploying that cash:

  1. Pay down debt
     
  2. Buy other companies
     
  3. Pay out dividends
     
  4. Buy back its own shares
     
  5. Let it sit in the bank and earn interest

The last option—let it sit in the bank and earn interest—isn’t very attractive in this day and age of zero interest rates, and most companies with gigantic cash hoards have already paid down most, if not all, of their debt, so the only viable choices are numbers 2, 3, and 4.


 
According to S&P Dow Jones, American companies spent $903 billion—$350 billion in dividends and $553 billion on share repurchases—in 2014. However, the pace of buybacks and dividends is expected to exceed $1 trillion in 2015.
 


ETFs have become a trillion-dollar industry, but ETF flows are a fraction of corporate America’s buybacks.

Heck, corporate America is now a bigger buyer of stocks than all the individual investors in America combined!


While those buybacks have buoyed stock prices, there’s also an ominous connect-the-dots warning hidden in the avalanche of stock buybacks: the stock market rally is driven more by financial engineering than by profitability.

No matter how many shares a company repurchases, what really matters is the health of the underlying business. Are revenues and profits growing? Or are those profits just being spread over a small pie of shares because of share buybacks?

No question: stock buybacks are the fuel behind this bull market.

At some point—next week, next month, next year—investors will wake up and realize the bull market is a house of financially engineered cards.

The news from General Electric last week tells me that that wake-up call may be right around the corner.

Last week, General Electric announced that it would return $90 billion to shareholders through a series of dividends and share buybacks. Investors cheered that news and sent GE stock up sharply.

However… in order to return that money to shareholders, General Electric said that it will need to repatriate some of it cash hoard currently residing in foreign countries.

That repatriation is expected to cost General Electric a whopping $4 billion in taxes!

Look, it doesn’t matter whether you’re the CEO of a giant company like General Electric or just a regular person like you and me… nobody likes to write big checks to the IRS.

What the General Electric action tells me is that it can’t make any more productive use of its corporate capital than paying dividends and gigantic tax bills.

This lack of productive uses for capital, when corporations are sitting on a collective $2 trillion, tells me the Wall Street party is just about over. Here’s how my Rational Bear readers are getting ready for the tougher times ahead.

When did Noah build the ark, Gladys? Before the rain.”

—Nathan Muir (Robert Redford), the movie Spy Game

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