International Forecaster Weekly

BIG BUSINESS PLAYING INTO GOLD'S HANDS - Stock Buybacks Overshadow Capital Outlays

As Big Business continues raking in record profits so far this year, two things are popping out:

Businesses have been investing more on improvements than any point before the pandemic, according to Oxford Economics.

Yet, the Delta variant is keeping more companies cautious about how to invest the huge wad of cash they have at their disposal. 

And that’s led to corporate spending on stock buybacks outpacing capital expenditures in 2021. 

Guest Writer | September 29, 2021

By Dave Allen for Discount Gold & Silver

As Big Business continues raking in record profits so far this year, two things are popping out:

Businesses have been investing more on improvements than any point before the pandemic, according to Oxford Economics.

Yet, the Delta variant is keeping more companies cautious about how to invest the huge wad of cash they have at their disposal. 

And that’s led to corporate spending on stock buybacks outpacing capital expenditures in 2021. 

Historic Capital Spending Rebound

By this year’s 2nd quarter, capital spending had staged a “historic rebound” from before the Covid shutdowns, according to Oxford lead U.S. economist Lydia Boussour.

Not surprisingly, she notes, the lion’s share of the increased investment since late 2019 has been tech-related, driven mostly by corporate America’s struggle to support remote work.

The top spending increase was on information technology equipment — up 20% in the 2nd quarter from the 4th quarter of 2019; software investment was next — up 17%.

But Lotsa Cash Breeds Buybacks

But with companies raising prices over the past year, many were left hoarding piles of cash and finding limited inventory to buy because of severe supply chain backups.

Companies in the S&P 500 held $3.7 trillion in cash and cash equivalents at the end of the 2nd quarter — up from $3.5 trillion a year before.

Stock buybacks have been their answer. 

To be fair, shortages in the capital and people needed for new projects are limiting how much companies can take on, leaving a lot of excess cash balances earning little to no interest.

Buybacks among S&P 500 companies reached $370.4 billion in the first half of 2021 — up 29% compared to the same period in 2020. Over the same period, capital expenditures reached $337.2 billion — up 4.8%. 

Notably, buybacks from the top 20 companies made up the majority (55.7%) of last quarter's buybacks — up from pre-pandemic historical averages (44.5%) but way down from last year’s anomaly (87.2%). 

In total, through September 8th, 114 new share-repurchase programs have been listed so far this year. 

Dell, News Corp. McDonald’s and Lockheed Martin all announced new buyback plans last week.

Buybacks, which were restricted last year, are viewed by company boards and execs as easier to pull back compared with other forms of capital investment such as equipment, land and buildings. 

The problem with buybacks is they’re an inefficient tool for promoting economic growth. In fact, they’re often a mirage of that.

No question they promote a company’s stock price and EPS (plus, they help corporate CEOs and CFOs look good to their compensation committees), but beyond that, you’d have to show me how they benefit our economy.

Some analysts believe that buybacks may reach a peak by early 2022 without any changes in current law.

However, they say that new taxes proposed to help pay for President Biden’s ambitious domestic agenda, could provide a longer-term disincentive for increasing buybacks from their current level.

A Balancing Act

Executives often face a balancing act as they look for the best use of their companies’ funds.

Hormel, the company behind Spam canned meat, Planters snacks and other brands, was planning more than $300 million in capital expenditures this year, including on expanding a sausage-making plant in Omaha, Neb.

CFO Jim Sheehan said that target was reduced to about $250 million, thanks to delays in shipments of equipment. “It wasn’t our intention to decrease our capex; it’s just been difficult to get tools,” Sheehan said, adding that the company plans to increase capital spending next year.

Home improvement company Lowe’s, however, spent about $6.2 billion on buybacks in the first half of 2021— over 7 times more than their $846 million in capital expenditures.

Lowe’s CEO Marvin Ellison said, “We’re investing as much as the company can absorb,” adding that the main bottleneck for the company is its “bandwidth for such projects.”

Will Taxing Buybacks Discourage Them?

Government stimulus efforts, like those launched after the Great Recession and during the current pandemic, are aimed in part at encouraging companies to invest in their businesses. 

Major corporations, however, have been criticized for using a healthy chunk of those funds on stock buybacks and dividends. 

Many CFOs say they don’t expect the short-term economic outlook to affect their spending plans. However, changes to tax rules, regulations and other factors could affect their decision making. 

One of them is a new bill introduced by Senate Democrats that calls for a 2% excise tax on buybacks or treating them as taxable dividends as a way of raising additional revenues. 

At first glance, some say, that could result in corporations slowing the flood of cash into buybacks that many rightly argue prop up share prices. 

And if the new tax were enacted, the chances that a 2% tax on buybacks would have a meaningful overall impact on the stock markets is probably modest. 

In any case, 2% on the $370 billion in buybacks enacted this year would yield $7.4 billion in government revenue each year — a drop in the bucket in the aggregate for most of the affected multinational corporations.

Besides, with government spending and Federal Reserve stimulus on steroids, investors buying on the dip have yet to let the S&P 500 Index fall by much more than 4% this year before swooping in to save the day.

So, regardless of why so many companies have been using stock buybacks, they don’t go far in growing the economy. 

            Instead, Big Business should focus their collective efforts on improving the labor market, getting more people back to work by increasing wages at the lower corporate rungs, thus reversing decades-long growth in income inequality.

In the meantime, look for stock buybacks to become as much as a headwind for Corporate America as its growing debt burden has. That should be good for gold and silver.