The unprecedented pile of cash on North America's corporate balance sheets might finally be set to shrink. But while the so-called "dead money" is showing signs of life, it would be a big stretch to call it lively, at least from a broader economic perspective.
Independent financial market research firm FactSet reported this week that cash holdings at S&P 500 companies were $1.34-trillion (U.S.) in the first quarter, down 4.7 per cent from the prior quarter. That's the first decline since 2012, snapping a string of six consecutive quarterly increases that had added nearly $200-billion to the U.S. stash.
In Canada, too, the cash buildup has reversed course. Statistics Canada recently reported that corporate cash balances fell to $464-billion (Canadian) in the first quarter, the first quarterly decline in a year. Canada's cash pile is more than $30-billion (or 6.5 per cent) smaller than it was at its peak in 2012.
From a longer-term perspective, the cash balances are still severely elevated. In both countries, corporate cash holdings are nearly double the levels that prevailed in the years leading up to the recession. Still, any evidence that all that cash is starting to be put to work would be a good sign for the Canadian and U.S. economies, both of which been hampered by sluggish business capital investment.
But even as the cash piles have begun to diminish, the amounts being committed to capital investment remain less than compelling. Canada's business fixed capital investment actually dipped slightly in the first quarter, and has barely budged in the past two years. In the U.S., fixed capital investment fell 1.8 per cent in the first quarter.
Where is the cash going, then? Well, mostly to investors. Canadian companies on the S&P/TSX composite index increased total dividend payments by 8 per cent last year. FactSet reported that shareholder distributions (dividends plus share buybacks) in the S&P 500 companies hit a record $249.1-billion in the first quarter. Capital spending by those same companies, by contrast, totalled $146.6-billion.
S&P 500 dividends have grown 13 per cent in the past 12 months, while buybacks have grown 34 per cent; capital spending in the same period grew just 6 per cent. In the past 12 months, U.S. companies have spent more than $500-billion (U.S.) buying their own shares – hardly a recipe for economic expansion.
While an uncertain economic horizon has certainly contributed to corporate hesitation on capital investment, the markets simply haven't been rewarding big-investing companies over the longer run. Royal Bank strategist Mark Chandler noted in a report this week that over the past five years, capital-spending-intensive sectors of the Canadian market have been the weakest performers. Similarly, Pierre Lapointe, head of global strategy and research at Pavilion Global Capital Markets, said in a recent research note that over the past decade, stocks of U.S. companies with the lowest capital-spending-to-sales ratios have outperformed those with the highest capex-to-sales by 40 per cent.
Mr. Lapointe noted, however, that in the past two years, the capital-spending-heavy companies have started to outperform – and suggested that company mentality simply hasn't caught up to the shifting trend. A recent Merrill Lynch equity strategy report argued that capital allocation is cyclical – as the economy accelerates, companies typically are rewarded more for spending than for saving – and suggested that we may be approaching an "inflection point" where economic growth opens the spending floodgates.
That sums up as well as anything the catch-22 for the North American economy on the business-investment front. We need businesses to spend in order to kick-start economic growth. But businesses are waiting for economic growth in order to kick-start their spending.