Corporations are hoarding cash: despite dividends and buybacks, cash is likely to hit another record high.
Cash set a record in the first quarter of 2013 on an absolute basis: $1.093 trillion in the S&P 500. It has set a record for 18 of the last 20 quarters.
With 47 percent of the S&P 500reporting,we are once again on track for record cash levels.
What's going on? The short answer is that companies are not spending as much...they have record earnings, but they are holding on to a lot of the money. Consider the places where they would spend their money:
- Capital expenditures have not risen much;
- M&A activity has been modest at best;
- Buybacks have increased, but they are nowhere near levels before the financial crisis. For example, actual buybacks were $100 billion for the first quarter of 2013. If you go back to Q4 2007, there was $142 billion in buybacks, Q3 2007 there was $172 billion;
- Dividends have gone up slightly, but they have gone down as a percentage of earnings. For the S&P 500, the payout ratio (the dollar amount companies are paying out as a percentage of earnings) is currently 36 percent; in Q3 2007 it was 45.8 percent.
Why is this happening? They seem uncomfortable spending the money. Why? The commentary seems to indicate they don't have a lot of visibility or confidence in future growth.
The good news is that with so much cash, companies are likely to at least continue to raise dividends.
By the way: the sector that has the most cash is technology. That sector accounts for 41 percent of all the cash in Q1. Historically, technology also has the highest cash-to-market-value ratio (15.1 percent). And the cash hoard there has been growing fast: it's up 11 percent year over year.
Note: in calculating cash levels for the S&P 500, Standard & Poor's routinely excludes financials, utilities, and transportation, since they are required to maintain high cash reserves as part of their normal operating process.
Consumer Staples are also growing their cash hoard: in the first quarter they increased cash levels by 17.6 percent.