Corporate Spending Likely to Lag
Companies are leery about their longer-term prospects, which means many will continue to hoard cash or distribute to shareholders, rather than making capital investments.
Economic concerns may be shaping companies’ response to the new tax law, leading executives to opt for acquisitions and shareholder-pleasing tactics such as buybacks over riskier deployments of capital.
Concerns about the outlook in the longer term led economists at the International Monetary Fund in January to lower five-year forecasts, even as they boosted prospects for this year and next.
IMF economists increased forecasts for U.S. economic growth this year by 40 basis points, to 2.7 percent from 2.3 percent, and by 60 basis points for next year, to 2.5 percent. But they expect growth after 2022 to be lower than initially projected, due in part to the temporary nature of the tax provisions and their anticipated impact on the deficit.
A group of economists surveyed by the Wall Street Journal, too, have indicated that they expect gross domestic product to slow to 2 percent annually in 2020, compared with a current estimate of 2.8 percent for the rest of this year.
Executives clearly have been paying attention.
A recent PricewaterhouseCoopers survey found that chief executive officers of mostly large global corporations are extremely optimistic about their company’s near-term prospects but are less so when looking to the longer term.
Indeed, this is the first time since 2009 that more chief executives in the PwC survey reported feeling only “somewhat confident” about their prospects in the long term, compared with those who said they feel “very confident” when looking farther ahead. The survey results were published in January.
“There are so many reasons why businesses would handle that money cautiously,” says Dr. Joel Naroff, president and founder of Naroff Economic Advisors, speaking about corporate windfalls from lower tax and repatriation rates. Naroff includes accelerating inflation and rising long-term interest rates as two specific concerns that company executives may be leery of.
Another recent survey indicated similar corporate circumspection.
A year ago, many more companies planned to spend down their cash—for example, retiring debt, buying back shares, or investing in capital equipment. When the AFP’s January 2017 survey was published, the index came in at “-7”; 23 percent of respondents expected to save, compared with 30 percent who said they would spend.
“When the Trump administration came into being, we saw a lot more optimism,” says Mariam Lamech, director of survey research at the AFP. “We were all very encouraged; people were telling us they were going to spend vs. hold cash.
“A reading of -1 could go either way so easily,” Lamech continues, “but we’re not very excited about it. Last year, we were a lot more excited.”
Since the January 2017 report, the Federal Reserve hiked interest rates three times and the stock market plunged on inflation fears.
Tax Law a Boon to Shareholders
Some larger companies have made no secret of their intent to opt for shareholder- and stock-market–friendly buybacks when they choose to spend.
Corporate stock repurchase programs are on a tear, with announced plans totaling more than $178 billion as of mid-February, according to data from Birinyi Associates. The market research firm’s data indicates that’s a record.
Companies such as Cisco Systems have led the way. Cisco announced earlier this month that after repatriating funds from abroad at the more attractive new rate, it would boost its share repurchase program to a total of $31 billion, in addition to increasing its per-share dividend by 4 cents, to 33 cents a share.
“We are going to continue to support the dividend and drive that up with earnings,” Kelly Kramer, chief financial officer at Cisco, said on a conference call recorded by investing website Seeking Alpha. And, Kramer added, “We’re going to be giving back to the shareholders through a healthy buyback.
“I’ll still be in a net cash positive position of $10 billion to $12 billion,” Kramer continued, noting, “we’re going to continue to be looking for the acquisitions that we can drive value and drive growth with.”
Still, as Peter Frank, principal of PricewaterhouseCoopers LLP and head of its U.S. Corporate Treasury Solutions practice, noted, regardless of headlining stock repurchase programs and concerns over the economy, “It’s very much ‘to be determined’ exactly how the funds [from the corporate tax law] get allocated, mostly because companies haven’t yet completely thought through the nuances of tax reform and what it will actually mean to them. There is a tremendous amount of complexity.”
Frank says that as companies adjust to the impact of the lower tax rate, they will be able to access new money that they may redeploy in as-yet-unexplored ways.
“Companies are working through how that cash will be allocated to different stakeholders,” he says, “including employees, suppliers, customers, and the business itself.”
But until then, stockholders are clearly benefiting from companies’ short-term moves—buybacks and more aggressive mergers and acquisitions that can achieve results that match their horizon of economic surety.
“The question is: What is the best return for them?” Naroff says. “They’re only going to invest if they think that they’re going to get a return, and a good return, from their investment.” That means they’ve got to take a look not only at the next year, but three to five years down the road or more.
“They’re not as optimistic that there is going to be an extended period of growth, and therefore either M&A, buyback stock, those are the things that really create a return, either to the company or to stockholders.”
Hilary Johnson is a freelance journalist and contributor to Treasury & Risk who has also written for Reuters, Barron’s, Crain’s New York Business, and Global Finance.