Who could have seen this coming?
For the first time in a decade, buybacks account for the biggest share of corporate cash use by S&P 500 companies.
In the lead up to the passage of the Trump tax cuts late last year, critics argued that invariably, corporations would use their windfall to return cash to shareholders as opposed to say, investing in their businesses or raising wages for employees.
Importantly, it wasn’t just critics of the tax plan who suggested shareholders would be the prime beneficiaries of the cuts. Rather, anyone with any sense knew that would be the outcome because, well, because that’s how things work in a world where investors are myopic and only care about the next earnings report and where management’s compensation is often equity-linked.
The point is, you needn’t have been an “anti-Trumper” to see where this was going.
Sure enough, buybacks have surged in 2018, helping to shield the U.S. equity market from the turmoil abroad, where, for instance, Chinese stocks are in a bear market, emerging market equities and FX are under siege from the stronger dollar and European financials and autos are themselves struggling to extricate themselves from a deep malaise.
In fact, Goldman’s buyback desk last month upped its estimate for repurchase authorizations in 2018 to a record $1.0 trillion. If that pans out, it would amount to a 46% increase from 2017.
So we know shareholders have benefited from the tax cuts and we know corporate bottom lines have been bolstered. But have workers benefited at all from the windfall to America’s largest corporations? Well, that depends on how you look at it.
When the tax bill was finally crammed through, the media was awash in reports of one-time bonuses for employees that amounted to rounding errors on C-suite paychecks and in one particularly amusing case, Hostess employees were given free Hos and all-you-can-eat Ding Dongs. That was a literal “let them eat cake” moment.
Aside from those obligatory nods to the proletariat, the bigger picture is that wage growth is still just barely outpacing inflation.
In fact, until Thursday’s cooler-than-expected CPI print pushed real wage growth back into positive territory, YoY earnings growth was negative. The latest CPI data suggests the American worker is indeed getting “richer” – at a “blistering” annual rate of 0.2%, and that assumes the government is calculating inflation correctly, a dubious assumption to say the least.
So that’s the backdrop for the following excerpts from a Goldman note out Friday evening. To wit:
Surging corporate profitability has led to a jump in share repurchases in 2018. S&P 500 revenues rose by 11% during 1H vs. the comparable year-ago period. EPS climbed by 25% during the first half as firms benefitted from lower corporate tax rates. As a result, S&P 500 cash flow from operations (CFO) surged by 35% to $917 billion in 1H 2018. The rise in CFO created a high-quality problem for managements: How should they spend all the cash?
For the first time in 10 years, buybacks are garnering the largest share of cash spending by S&P 500 firms. Capital spending has typically represented the largest single use of cash by corporations, a position it has held for 19 of the past 20 years. Buybacks increased by 48% to $384 billion during 1H 2018 vs. $259 billion in 1H 2017. Furthermore, 2018 share repurchase authorizations for all US companies have totaled $762 billion through mid-September and our buyback desk estimates repurchase authorizations will set a new full-year record and surpass $1 trillion.
Hooray! For shareholders. And for management.
To be fair, corporates have been investing in their businesses and as Goldman goes on to write, capex is actually booming. “S&P 500 capex during 1H rose by $55 billion to $341 billion vs. $286 billion in 1H 2017 (+19%) [and] if this pace persists, it would represent the fastest growth in capex in at least 25 years”, the bank’s David Kostin notes, adding that “R&D spending rose by $18 billion during 1H to $147 billion (+14%), the highest rate of increase in more than a decade.”
So that’s good news, and Goldman goes on to explain that buybacks are much more concentrated than capex, as just 10 stocks with the biggest dollar jump in repurchases make up more than three quarters of aggregate S&P buyback growth, while the median S&P firm logged capex growth of 11% during the first half of the year.
Still, the big picture is pretty clear – shareholders are prioritized at the aggregate level. That’s fine in the sense that management obviously has a duty to shareholders and as long as companies are also investing enough in the business to ensure its long-term viability, there’s no problem.
Well, no problem except for those pesky workers who keep insisting on getting paid.