S&P 500 Industrials have easily set a sixth consecutive quarterly record for cash and equivalent on hand (under current assets, mark-to-market), sitting on what amounts to 94 weeks of net earnings (latest 12 months). The $1.3 trillion is not making much as it sits in short-term investments or banks, regardless of its U.S. or foreign domain. The cash is however getting a lot of attention, especially from activist investors, who see the pot of gold at the end of a short rainbow.
The How is easy, the Why is not.
For 2013, earnings (with a supporting hand from higher margins) and cash-flow both set a new record. However, it’s not always what you make, but what you spend. And while dividends and capital expenditures also posted new record highs, and buybacks increased 30%, income was stronger.
Dividends, while at record levels, are only 36% of income (historically they are 52%), and Capital Expenditures appear (my review is not complete yet) to be more about maintenance and production increases than new plants and expansion. So cash keeps going up, as does the actions by those attracted to it.
The Why is ‘why aren’t companies spending more’, which is not as quantifiable. Sales, which only increased 2% in the S&P 500 last year, remain the main concern, and to some degree is the main reason. No company is going to produce 110 widgets when they only think they can sell 100 (regardless of tax credits or incentives; there are 60 credit items on the Senate table in April), with the key word here (in my opinion) being ‘think’.
Confidence in the economy has grown, as the economy has demonstrated its ability to ride through tough times (recession, budgets, deficits, sequester, government shut-downs and the weather) and still produce growth. However, growth in leadership still (to me) appears to be a bit lacking.
There are some signs that spending is increasing, and along with it some corporate commitment. However, ‘some’ will be slow, and while slow and steady has worked for the stock market for the last year-and-half, I’m not as certain about the steady when it comes to the economy. Regardless, cash is enormous, with enough money for companies to do whatever they want. And when they start spending it – that is where you want to be.
This article was written by S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt.
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