American conglomerates, from financial powerhouses to tech giants, have also hoarded cash to combat storm COVID-19.
Investment-class firms ended 2020 with cash and cash equivalents averaging nearly 33.3% of their liabilities, according to the latest S&P Global report, using the latest data on the companies it ranks for. This is slightly lower than the average peak of the cash pandemic of 34.3%, but still much higher than the 19.3% cash level seen at the end of 2019, before the world goes away. enter crisis mode.
Now, with the US vaccination effort intensifying and the economic recovery hitting higher levels, large companies are increasingly expected to ditch their vault to fund stock buybacks. promissory note.
“Companies have a lot of cash,” said Michael Arone, chief investment strategist at State Street. “And if you think about how they can use this cash, stock repurchases can be attractive in an uncertain environment.”
To that end, Arone expects share buybacks to grow 30% by 2021 from last year’s decline, but still about 24% below its 2018 peak of around 800 billion. USD share buyback every year.
This chart shows a higher share buyback for the S&P 500 Index
companies since last year’s lows. It also sees new increases in global mergers and acquisitions.
Arone says acquisitions can be a “pretty conservative” option for companies looking to spend cash, while also looking to balance concerns about possible corporate tax and borrowing costs. than.
Corporate taxes could be raised to 28% from 21% under President Biden’s $ 2.3 trillion infrastructure plan, Big businesses have begun to push back against.
“The downside would be that company executives don’t use the excess money to reinvest back into their businesses, gaining an advantage over competitors,” he said.
The following section of S&P Global illustrates how the higher cash levels of businesses today overlap in comparison to the past, but also highlights the degree to which investment tier firms are holding relative to their tier counterparts. their speculation. Cash levels are also broken down by industry, including for information technology, media and finance companies.
Bank of America
Stocks moved higher this week after it was reported first quarter profit more than doubled expectation on Thursday and announce a shocking $ 25 billion acquisition program.
Blockbuster financial results from major banks have helped lift the Dow Jones Industrial Average benchmark
and the S&P 500 index to a new all-time high this week. On the other hand, repurchases can also be criticized when they happen when the stock has traded at historically expensive prices.
JP Morgan Chase & Co.‘S JPM the board authorized a $ 30 billion stock repurchase program in December, with an expected target in the first quarter, just after the Federal Reserve in December. easing the ban on large banks stock repurchase during the pandemic.
The suspension was launched last June to help ensure the banking sector has enough capital to function through the coronavirus crisis. The payback allows for repurchases, as long as the total amount of repurchases and dividends do not exceed the average of the net income for the next four quarters.
In particular, debt investors often prefer companies that hold cash to pay off existing debts, before stock repurchases or dividend financing. Big companies have borrowed trillions in the US corporate bond market last year to build cash buffers and help finance their operations through a crisis. Debt issuance speed has slowed since then, but remains strong this year as corporate executives seek to avoid paying more to borrow later, as interest rates rise.
Corporate bonds pay investors a premium, or premium, through the risk-free Treasuries. Rate fluctuations can lead to higher or unpredictable loan conditions and headaches business executives trying to figure out the long-term path for the company.
While the Federal Reserve has repeatedly promised to keep short-term rates close to zero until the economy fully recovers from the pandemic, the 10-year Treasury yield
TMUBMUSD10Y is up about one percentage point from its August low.
Firms may also seek to borrow in the bond market prior to any change in corporate taxes.
Nicholas Elfner, co-lead research group at Breckinridge Capital Advisors, writes of the second-quarter outlook: “The US Federal government debate regarding the increase in corporate and personal taxes started to heat up as the first quarter. first ended.
“Although any change in tax rates is difficult to predict at this time, the potential for a corporate tax rate increase cannot be reduced. In the long run, expected income growth can be curbed with tax increases. “