Corporate America is putting its cash hoard back to work.
In the first decline since mid-2009, Standard & Poor’s 500 companies reduced cash and short-term investments to $2.41 trillion from a record $2.46 trillion, according to data Bloomberg compiled from their most recent quarterly reports. Capital spending increased $22.3 billion, the biggest quarter-to-quarter jump since the end of 2004, to $142.8 billion, the highest level in two years.
Budgets are rising for new plants, distribution centers and stores from S&P bellwethers Cisco Systems Inc., General Electric Co. and Coca-Cola Co. While some of the money is being spent abroad, company officials say they are opening the purse strings at home now too. A rebound in economic demand, President Barack Obama’s efforts this year to court business leaders and Republican gains in Congress have helped build confidence to invest and start adding jobs, executives and investors said.
“What you’re seeing is business and government learning to work together,” Cisco Chief Executive Officer John Chambers said in a Feb. 9 interview. “There are good steps starting to occur, but they are just initial steps.”
Cisco, the largest provider of networking equipment, had $326 million in capital spending in each of its two most recent quarters, the most since the height of the global financial crisis in October 2008.
U.S. companies accumulated record cash last year after they slashed spending, shut factories and fired workers in 2008 and 2009 to cope with the worst recession since the 1930s.
The dearth of investment took a toll on jobs, with the unemployment rate averaging 9.6 percent in 2010. An increase in spending this year may help lower the rate to 9.2 percent, the average estimate of 87 economists in a Bloomberg poll.
Companies held their cash partly on concern that health-care mandates and increased financial regulation would add costs, said Barry Knapp, chief equity strategist for Barclays Plc in New York. Elections in November, in which Republicans won back a majority in the House of Representatives and gained seats in the Senate, have changed the climate for business, he said.
“Corporate America now views that there’s a check on the progressive policies of the last couple of years,” Knapp said. “Business confidence has improved, and that’s contributed to some increased risk appetite.”
Obama has met with CEOs including Chambers, Jeffrey Immelt of GE and Kenneth Frazier of Merck & Co. in an effort to build confidence in the recovery. The U.S. economy may expand 3.2 percent this year, the most since 2004, according to the average estimates of 90 economists compiled by Bloomberg. The economy last year grew 2.9 percent after shrinking 2.6 percent in 2009.
Obama backed a compromise to extend tax breaks that were set to expire in December and a measure to accelerate tax deductions on equipment. He has countered executives’ criticism with a call to lower corporate taxes, freeze federal spending and review “outdated and unnecessary” regulations. In return, at a Feb. 7 speech to the U.S. Chamber of Commerce, he asked companies to invest and create more jobs at home.
The equipment measure was the largest temporary tax incentive for investment in U.S. history, Austan Goolsbee, chairman of the White House Council of Economic Advisers, said in an e-mailed response to questions.
“This, together with a broader restoration of confidence, is helping businesses come off the sidelines, invest in America and create jobs,” Goolsbee said.
Profits, Not Presidents
Decisions to expand in the U.S. ultimately come down to profit and not a presidential nudge, Daniel DiMicco, CEO of steelmaker Nucor Corp., said in a Feb. 9 interview. Companies won’t invest “unless they have the opportunity to be more profitable by doing that as opposed to investing the money someplace else or holding onto it,” he said.
Nucor, the largest U.S. steelmaker by sales, said in September that it will build a $750 million iron-making plant in Louisiana and create 150 permanent jobs with salaries averaging $75,000 a year. Charlotte, North Carolina-based Nucor’s capital spending rose 42 percent between the third and fourth quarters, even as its cash and short-term investments rose 24 percent.
GE has been investing at home and overseas, adding more than 6,300 U.S. factory jobs since the start of 2009. Expansion abroad isn’t always at the expense of American jobs, said John Rice, vice chairman and head of GE Global Growth and Operations.
“We get market access, we create jobs in both places and we end up doing things that neither us nor our partners” could do alone, Rice said at a Barclays conference on Feb. 8.
GE plans to spend about $6 billion on research and development this year, including $1 billion in customer-funded projects, double the spending of a decade ago. The Fairfield, Connecticut-based maker of jet engines and refrigerators has used its discretionary cash of more than $20 billion to raise its dividend and to begin buying back shares for the first time since 2008.
Coca-Cola, the world’s largest soft-drink maker, reduced its cash and short-term investments by 15 percent to $11.3 billion from the third to the fourth quarter, while doubling capital expenditures to $880 million.
CEO Muhtar Kent said the Atlanta-based company got ahead of the recovery and Obama’s call for U.S. investment. In the past two years, Coca-Cola spent $5.5 billion on production plants, brand advertising and distribution initiatives.
“I don’t need to agree, I’ve done it,” Kent said in a Feb. 9 interview. “In 2009, we probably invested about $2.5 billion in this country, when everybody probably wasn’t investing at all, and that has created jobs.”
One way to spur investment is to lower the top corporate tax rate, said Keith Nosbusch, CEO of Milwaukee-based Rockwell Automation Inc., and Marcel Smits, CEO of Sara Lee Corp. The U.S. top corporate tax rate will be the highest among developed nations at 35 percent after Japan pares its rate this year.
That creates an “ironic situation” for Sara Lee, Smits said. When the Downers Grove, Illinois-based foodmaker expands in the U.S., the additional domestic revenue faces a higher levy than sales generated abroad, he said.
“In Europe, you see real competition between countries, which drives the tax rate down,” Smits said.
Rockwell and Sara Lee
Rockwell reduced its cash and short-term investments by 5 percent from the third to the fourth quarters, while capital spending fell 55 percent to $20.3 million. Sara Lee did the opposite, with its cash almost doubling and capital expenditures rising 29 percent to $85 million.
Cisco’s Chambers echoed the call for lower corporate taxes, part of the reason he says only about $3 billion of his company’s $40 billion is kept in the U.S. Even so, Cisco has added about 10 percent to its U.S. workforce in the past year and a half, similar to its growth overseas, he said.
Businesses outside the S&P 500 also are beginning to spend. Buffalo Wild Wings Inc. will add 5,500 jobs and open more than 100 restaurants this year, CEO Sally Smith said in an interview. Capital expenditures will climb to about $120 million, she said. Spending was $73.4 million in 2010, Bloomberg data show.
“Not only are we hiring with new stores, but at the home office and at the field-support level, as well,” she said.
The attention Obama is giving to companies is a welcome first step, Rockwell Automation’s Nosbusch said.
“Any time the administration is speaking positively about the business sector, it’s good,” Nosbusch said. “It’s good for job creation. It’s good for the economy and I think it’s good for the country at the end of the day.”
The Bloomberg data examined the most recent quarterly figures reported by S&P 500 companies, regardless of the specific calendar period. About 75 percent have reported so far in the current cycle, and final totals may change. The S&P 500 increased 12.8 percent in 2010, compared with 11 percent for the Dow Jones Industrial Average.