Connecting the Dots: Corporate America’s Millstone of Too Much Cash
By Tony Sagami
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:
- Pay down debt
- Buy other companies
- Pay out dividends
- Buy back its own shares
- 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
Tony Sagami
30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.
Now let’s take a look at the debt of those firms. Ouch!
In a real economy, all that money would have been spread around america through wages, dividends, capex, operational costs, and yes henrietta, taxes. Wouldn’t need no welfare state. Wouldn’t need no QE.
Hang on a minute Tommy and star,
The article says those companies have already paid off their debt.
Why should their money be “spread around America” when so many of their employees and so much of their sales are overseas?
A great deal of it HAS gone into dividends, so that’s going to anyone who holds their stock, whether they live here or overseas.
I doubt there is a lot of capex going on, since we have reached peak growth.
Operational costs and wages should stay about the same – there are simply too many people looking for jobs to give everyone a raise.
GE just paid $4 billion in taxes to repatriate cash, so those taxes will help fund the welfare state.
I’m thinking employee-owned companies could be a possible solution. If you worked for GE and saw stagnant wages, the dividends on your company stock would help make up for that and also give you some buy-in.
Just thinking …
Pirate jo, the game is played a little different than you might think. Let’s say the roobin company makes a door in vietnam that costs two bucks to build. Might be able to sell it in vietnam for two fifty. Here it’s two hundred bucks at the roobin store company. So roobin co. sells the door to rubin store co. (in vietnam) for 180. All that profit is from ‘foreign sales”. Tax free. Hahahahahahaha
A lot of hoarded cash -hoarded is like the hoarded cash individuals have in their savings and retirement accounts and such- is in overseas accounts where it cannot be brought back to the U.S. without paying large tax penalties.
Free trade has moved a good deal of former domestic business activity overseas and the profits over there along with it. Those profits are outside of U.S. taxation in many cases unless it is brought back into this country.
There is little incentive to bring it back because of this but a large incentive not to, the same way there is little incentive to hit up your retirement account for cash before you are old enough and a lot of incentive not to.
You want the money to come back and circulate in our economy you need to address this situation, and in a manner that doesn’t give incentive to becoming a wholly foreign corporation to avoid being penalized here and rewarded there.
So star, if roobin sells the door to the store in Vietnam for $180 but the door only sells (there) for $2.50, how are they making money? You say there is “profit” from “foreign sales” but to me it looks like there is no profit. The only way to show a profit from Vietnamese operations is by making the doors there for $2.00 and selling them for $2.50.
Roobin sells it in vietnam for 180. to their subsidiary who then imports it to the US, and sells it for 200. That way, almost all the profits were banked in vietnam (foreign sales!!!) It’s bullshit. They couldn’t turn a profit selling in vietnam. Too poor.
Am I missing something here? Isn’t investing in production (machines,manpower and buildings) as opposed to just buying up other companies another option?
Cantbaretowatch – bwahahaha!
Why would they invest in the US when they can get all those things cheaper elsewhere, plus lower tax rate, fewer rules and regs and EPA restrictions, plus huge incentives, plus ad infinitum.
The US is not a good place to invest.
What you mention is the equivalent of taking the money out front, pouring gas on it, and burning it. Yes, that is an option, too. Just not a viable one.
Also cantbear, to invest that money in the US, they would first have to pay tax on it. And they do not want to do that.
These cash-rich corps need the money for their lobbyists to buy off politicians and pay for favorable legislation. Especially during a presidential election year. It’s the American way (am I jaded or what?).
Viable? You think buying another company in such crappy shape that it has to sell itself is Viable? You think parking the money and earning less than 1% in a 3%+ inflationary world is viable? How about buying back shares to boost EPS? Viable? At the peak of the market? None are viable. That is the problem. My point Lolipop Licker is that a serious all encompassing list may have included investing directly in its own biz. Other wise why not higher $10 hookers and stick Ben Franks in their thong. That’s got to be more productive than burning it. Atleast you would be puting the money back in to circulation.
Cantbethatstupid – they buy back shares on borrowed money. Very viable at zero interest rates. Peak of market? Sure about that? Mortgage your home and go short, big shot.
They are investing in their corps, just not in the US. Also, when wages are so low overseas, there is not much incentive to automate. When wages rise, they will.
Your suggestion is not serious, will not happen, and is just a wish that corps will work against their own interests in order to benefit the US. It is not an option. They will not crystallize the taxes in order to invest in a high wage, highreg, high tax situation.
Most of these “US” corporations are anything but US producers. So much of the business reported on Wall Street is from outside the borders, Llpoh & Anon are 100%, zero incentive to bring it back to our shores.
Capex spending isn’t listed because it has been WAY down if looking at US, non-for-benefit-of-executive-offices. The only time these business seem to build here is if they are gifted tax-abatements, grants and loans to do so. They still don’t use their own money.
This country is NOT suitable for producing ANYTHING, anymore. We have taxed, regulated, fined and sued business away and the damned slave-wages are nothing but a bonus.
This money isn’t coming back, but my guess is eventually the executive rats will start jumping ship. If they already haven’t.
Stick a fork in the common man, we are done. The few of us left that have tried to do the right thing and invest in business and savings are golden goose and our egg laying days are reaching the end.
Keep on demanding more perks, more wages, more protection and safety, we are nearly to the point where it kills us all. Or most.
TE, the cracks in the hull of the SS clinton, combined with scott walkers new stand on immigration, could spark changes we couldn’t imagine a month ago. The raw, in your face corruption of the clinton machine is a spectacle to behold, and for whatever reason, is being dragged into the sunlight. That bitch was thinking she was going to be queen, she’s going to be lucky if she doesn’t spend the rest of her life in prison
Thanks for explaining, star – that makes sense now.
Ok. I understand what you are saying. Ll. I don’t find any argument with that. My point is as a list of options (viable or NOT), the option to invest in itself should have been on the list. That is it. I look around and see buildings, machinery, co cars and employees. Obviously these companies invested in their own biz. So they had that option. That option is not on the list.