Handed $30 Billion, Corporate America Is Splurging on Everything

  • During the first quarter, tax cuts didn’t change behavior much
  • S&P 500 companies continue upping capex, buybacks and cash

The corporate tax cut put some $30 billion into the pockets of America’s largest companies in the first quarter. How’s it being spent?

Not necessarily the way President Donald Trump and Republicans said it would. They sold the cut as a means for companies to spur investment in America and create jobs.

But S&P 500 companies aren’t following through, at least not yet. Relative to cash flow, they are spending about what they always spent on such things as job-producing capital expenditures and shareholder goodies in the form of dividends and stock buybacks.

In short, as the charts below show, the pie is getting bigger but the slices are all the same proportions as before. That suggests the massive tax cut hasn’t changed corporate behavior so far. Caveat: It’s early.

Capital Expenditures

Companies are spending roughly the same as always on big investments, on a relative basis

Source: Bloomberg

Note: Current year ratio is based off analyst estimates for capital expenditures and actual trailing 12 month free cash flow. Excludes real estate companies and those without capital expenditure estimates (n=411).

Even before the tax law passed in December -- reducing corporate levies to 21 percent from 35 percent -- companies were expected to substantially increase spending on things like new factories, offices and equipment.

And that’s happening, with such spending by companies in the S&P 500 estimated to rise 18 percent this year to $641 billion.

That stat looks impressive and has garnered a lot of headlines. But that increase is about the same as in 2014. Moreover, the projected spending just about matches what companies allocated in the past three years as a percentage of their free cash flow -- about 43 percent. (Cash flow is a key measure of core profits.)

Of course, analyzing capex so soon is fraught. Major investments often take years to plan. Royal Caribbean’s capex is expected to surge more than 500 percent to $3.6 billion this year because it’s paying for cruise ships it ordered a decade ago.

Buyback Binge?

Stock repurchases are at a high on a dollar basis, but lag as a percent of total index market capitalization

Source: S&P

Note: S&P did not supply data for Q1 2012

Share repurchases by S&P 500 companies surged 34 percent to $178 billion, according to an analysis by Standard & Poor’s. But that spending accounted for 0.76 percent of the S&P 500’s market cap. That’s in line with the 5-year average of 0.72 percent.


More of free cash flow is going to stockholders but it's far from record levels

Source: Bloomberg

Note: Excludes companies that have not paid dividends in each quarter

In the first quarter companies boosted dividends by 8 percent to $116 billion. In percentage terms, though, it was little changed from the average of the previous four quarters -- about 46 percent of trailing 12-month free cash flow.

Wage and Benefits

While companies continue to be stingy in giving out pay raises, their spending on pay and benefits is rising quickly

Source: Bureau of Labor Statistics

The tax overhaul received oodles of positive press in December and January when companies, like Walmart Inc., announced one-time bonuses and expanded benefits for employees. That may have boosted total compensation, which includes pay and perks. That measure climbed 2.7 percent in the first quarter, the best performance since 2008.

But wage gains alone remain tepid. In the first quarter, the measure barely moved above the 2.2 percent average of the recovery, and in April it missed estimates.

Cash Pile

Cash growth has stayed flat on a relative basis

Source: Bloomberg

Cash on hand at S&P 500 companies is soaring to record levels in 2018, to $1.78 trillion, boosted in part by the tax cut. But on a relative basis, their cash holdings rose 4.6 percent, slightly below the average quarterly gains last year. That suggests uncertainty over how the tax law will be implemented, especially how overseas profits will be treated.

— With assistance by Sony Kassam, Sho Chandra, Katia Dmitrieva, and Joe Deaux

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