Hope that companies will begin deploying cash to grow sales and hire workers remain just that—hope that it will happen but defied by a reality showing that corporate America is still playing it relatively safe.
Business investment remains elusive for companies that have watched their share prices soar by cutting costs and returning money to investors.
Capital expenditures—or capex—have been the missing link for the economy, with firms instead plowing about $1 trillion into share buybacks and dividend increases since the end of the recession and the onset of historically easy monetary policy. In the meantime, cash on the balance sheet remains at an elevated $1.9 trillion while long-term unemployment persists and corporate infrastructure continues to age.
“Public companies should not make money just to buy back stock,” analyst Don Rissmiller at Strategas said in an economic research note. “The purpose of the capital markets is to fund growth—as is commonly noted, the people with the good ideas are not always the people with money. The capital market matches the two.”
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What has happened much more often over the past five years, though, has been a capital market that has matched cheap money with companies more than willing to take it. They’ve used that cash to reward the 20 percent minority that owns the lion’s share of the stock market, to the detriment of a labor force and a broader economy that relies on sales growth to expand.
Rissmiller noted that bottom-line profit for S&P 500 companies has exploded 119 percent since 2008—when the Federal Reserve began its zero interest rate policy—while sales growth has been a paltry 7 percent.
“Cost-cutting (including lower interest costs) and share repurchases have made up the difference,” he said.
As part of hopes for economic escape velocity for 2014, many high-profile economists have been preaching the capex theme. But so far the biggest headlines have come from still more buyback intentions.
Apple‘s intention to purchase $14 billion of its shares has led the first-quarter buyback parade, and numerous other companies have followed suit.
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That hasn’t stopped the capex believers from insisting this year will be different.
“If corporations begin to spend more on capital projects, they could spend less on stock buybacks and dividend increases,” Dick Bove, vice president of equity research at Rafferty Capital Markets, said in a note on the topic. “This would be a corporate taper mirroring the Federal Reserve taper.”
Bove’s point is an important one: Much of the stock market growth since the lows of March 2009 can be traced directly to Fed money-printing.
The central bank has expanded its balance sheet to more than $4.1 trillion, mainly through the purchases of Treasurys and mortgage-backed securities. The purchases have dovetailed with a near-zero interest rate policy, with the twin effects being a fertile environment for companies to borrow low-cost money to reduce share count and boost their stock prices.
But the Fed is planning on scaling back those purchases this year, with the market believing that the quantitative easing program will be over by the end of 2014.
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Corporate America, then, will be left to take the handoff for growth, something that would have to be done through expansion. S&P 500 companies have set multiple records for profit by slashing employment and expenses, but have cut to the bone and will have to spend money on capital and labor if they want to grow more.
Bove and others point to a few supporting factors for capex this year: Productivity—often a leading indicator for capex—has shown some signs of life lately, while banks have indicated in Fed surveys a willingness to make commercial and industrial loans, the backbone of capex growth.
Finally, chief financial officers responding to the most recent Duke University CFO Survey project a 7.3 percent increase in capex for 2014, up from the anemic 2013 where spending barely hit 3 percent.
“Hopefully what those numbers drive home is it’s not a flash in the pan sort of idea,” Tom Porcelli, chief U.S. economist at RBC Capital Markets, said in an interview. “These are the foundational sort of components of a capex story. If that’s true, then they’re also thematic.”
Not all capex is created equal, though.
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S&P Capital IQ senior index analyst Howard Silverblatt said the numbers in the Duke survey sound about right for capital spending this year, but it may not manifest itself in ways that foster strong growth.
“The means to get there, for what we’re looking for, is new jobs. That speaks to a new plant or bringing in that second shift or expansion,” he said. “We haven’t seen the new plants and the ships yet.”
What Silverblatt did see in the fourth quarter through his data analysis at S&P is another huge period for stock buybacks—about 31 percent higher on an annualized basis.
“More companies are doing it They have the ability to do it—the cash is high,” he said. “We still don’t see … new plants being built, ships being added. We see a lot of maintenance work, efficiency things, but not where I’m building a new plant.”
In addition to the simple hope for more capex, there is some evidence that companies are putting money to work.
Mergers and acquisitions, for example, have surged out of the gate, with $266 billion committed in the U.S. in 2014, the highest year-to-date level since 2000, according to Dealogic. The $69.8 billion bid from CNBC.com-parent Comcast to purchase Time Warner Cable greatly helped drive that number.
However, M&A is not generally associated with employment growth, though it can help plant the seeds for future expansion.
In the interim, investors, after being content with simply watching their portfolios grow thanks to cost-cutting and Fed largesse, have indicated their sentiments are changing.
The most recent Bank of America Merrill Lynch Fund Manager Survey, released earlier this week, showed investors “demanding corporates put their cash to work in the real economy.”
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A record 69 percent of respondents said companies are underinvesting, while the gap between investors demanding capex against returning cash to shareholders also grew to a record 33 percentage points—58 percent to 25 percent.
They don’t appear optimistic about getting their way, though, with eight of 10 predicting below-trend growth and a tendency for investors to avoid committing their own cash until they see capex increasing.
A survey at the end of 2013 backs up that sentiment, with Factset predicting just a 1.6 percent increase in 2014 due to a slowdown in telecom and utilities.
Still, the hope persists.
“Early on in the recovery capex was the one thing that was really keeping economic activity afloat,” Porcelli said. “We have since pulled back as the 2013 number would suggest. What we think is we’re basically on the verge of better outcomes.”
—By CNBC’s Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.