Corporate America Puts $2 Trillion in Bank in Run-Up to Election

(Bloomberg) - Stingy by the pandemic and shy of the elections, U.S. corporations have rethought their spending plans for everything from shareholders to factories. As a result, the cash is pooling on the balance sheets, raising funds for rainy days to an unprecedented $ 2 trillion.
While analysts have a million ways to spend it, the market's preference is clear: Don't. This was bad for your stock. According to data from Goldman Sachs Group Inc. and Bloomberg, companies that invest the most in share buybacks and capital investments have left the S&P 500 behind since its March low. During this time, companies with more stable finances beat the weaker ones by nearly 20 percentage points.
It's all about when cash is idle, especially when the US is trying to get out of a recession when uncertainties about vaccines and who will become president remain high. With a new financial package stalling in Congress and campaigning becoming chaotic, the effect of tighter purses in Corporate America can go beyond markets and become an economic story as well.
"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, AlphaSimplex Group. "It is less clear what the opportunities are."
A Goldman Sachs basket of high capital expenditures is down nearly 7% this year compared to a similarly sized profit for the S&P 500. The basket that brushes sector weights to make sure no industry is dominating includes Western Digital Corp. (minus 38)% in 2020, AT & T Inc. by 22% and Merck & Co. by 9%. The company's cash return basket, including Altria Group Inc. and Booking Holdings Inc., is down 1.5%.
Reluctance to put money on work began when the pandemic broke out and showed few signs of easing. S&P 500 companies cut share buybacks 46% to an eight-year lows in the second quarter, while their investments fell 15%, data from S&P Dow Jones Indices and Barclays showed. Coupled with the rush to raise money in the markets amid the worst drop in earnings since the global financial crisis, it means cash has been piling up.
Anemic business spending may self-satisfy when it comes to the growth impact. Given the sluggish economy, companies are reluctant to use cash and are hungry for much-needed fuel. In addition, there are increasing virus cases and blue-chip companies in many areas announcing tens of thousands of layoffs.
"If we had more clarity that we had a sustainable budget cushion and that things were going to stabilize over the longer term, it would be very reasonable for companies to look for productive uses for that money," said George Pearkes, Bespoke's global macro strategist Investment Group. "But if I'm on a management team right now, why should I get rid of cash when I see the economic data I see?"
An analysis by Barclays strategists, led by Shobhit Gupta and Maneesh Deshpande, which scoured corporate earnings calls and took into account key economic indicators, revealed a muted rebound in those spending for the next three quarters.
Some ways to spend money turned out to be short. The March sell-off was quick, as was the recovery, leaving deal-makers with little time for takeovers. Outside the pharmaceutical and technology industries, activity remains subdued. Announced mergers and acquisitions totaled $ 2.1 trillion in the first nine months, 22% less than the same period last year, data from Bloomberg shows.
Now that the price-to-earnings ratio of the S&P 500 has been raised to levels nearly two decades ago, acquisitions don't look like a smart way of managing cash. Neither do share buybacks, which politicians have often criticized for enriching the rich. It's another puzzle that executives face when millions are unemployed.
"The buying opportunities sparked by the pandemic didn't last long enough to trigger an M&A boom," said Ed Yardeni, president of Yardeni Research. Buybacks are "broken for now," he added.
Of course, some companies don't want to sit on their war crates. For example, ConocoPhillips announced that it will resume its share buyback after a five-month hiatus, while Marathon Oil Corp. reintroduced its dividend. Others, including Starbucks Corp. and Conagra Brands Inc., have increased their payouts in the past few days.
A large group of dividend payers isn't coming back anytime soon, however. The largest US banks are unable to return cash to shareholders as the Fed extended restrictions on the industry until the end of this year.
For Howard Silverblatt, senior index analyst at S&P Dow Jones, it's difficult for companies to plan ahead if they don't know when the virus might be tamed.
"You have all this money, where are you going to spend it?" said Silberblatt. "It definitely depends on how we deal with the virus. Not necessarily a cure, but some kind of control over it."
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