Many investors are betting that companies with large hoards of cash on hand will use that money to buy back stock and to fund capital expenditures. Hardika Singh reports for The Wall Street Journal:
Investors are betting that cash-rich companies will increase spending on everything from factories to share buybacks, a combination many believe can boost stocks in coming months.
Businesses including Tyson Foods Inc., consumer-products firm Newell Brands Inc., Morgan Stanley and alcohol seller Constellation Brands Inc. have said in recent weeks they plan to build factories, expand research budgets, pay down debt or seek acquisitions while also giving priority to dividends or share repurchases.
The hoard of cash held by U.S. companies is a key comfort for U.S. investors, despite worries that the spread of the Delta variant of coronavirus could dent the burgeoning recovery. Steady demand for stocks from companies joins a glut in household savings in powering indexes to highs, though the S&P 500 slipped 0.7% Tuesday.
At the same time, signs of growing capital expenditures are helping reassure those worried that companies will return money to shareholders at the expense of long-term business investment that will increase jobs and economic growth.
“As long as they keep the money spread out, we say that is a good thing that is going to enhance productivity, potentially revenue growth,” said John Augustine, chief investment officer at Huntington National Bank. He said he is buying stocks of companies that have reported strong earnings and guidance.
S&P 500 firms are projected to increase cash spending to $2.8 trillion in 2021, mostly on capital expenditures, mergers or other types of business investment, according to recent research from Goldman Sachs Group Inc. Meanwhile, companies have authorized more than $680 billion in stock repurchases through July, a figure exceeded only by 2018’s record in data going back to 2000.
That marks a reversal from last year, when companies slashed expenditures, cut dividends and slowed share repurchase programs while borrowing heavily to bolster their balance sheets against the pandemic’s disruptions. Now flush with cash in a rebounding economy, companies are announcing plans to increase spending broadly.
Cash holdings among S&P 500 companies hit $2.01 trillion on Aug. 13, according to Dow Jones Market Data—an increase of more than 30% from the end of the third quarter of 2019.
Read more here.