GOLDMAN SACHS: America's largest companies will spend $2.7 trillion of cash next year. Here are the 5 ways they will use it.

Reuters
  • Companies within the S&P 500 are expected to grow cash spending by 2% to $US2.7 trillion in 2020, according to a new analysis from Goldman Sachs.
  • That figure stands in sharp contrast to the expected 6% contraction in spending in 2019 as share buybacks continue to fall and cash acquisitions slow down.
  • Here’s are the five ways Goldman expects America’s largest corporations to spend their cash in 2020, in increasing order of size.
  • Visit the Business Insider homepage for more stories.

America’s largest companies are expected to spend about $US2.7 trillion of cash next year.

That’s according to a new analysis from Goldman Sachs, which forecasts that cash spending will increase about 2% in 2020 amid a rise in growth investments.

The forecasted increase in 2020 stands in sharp contrast to the expected 6% decline in spending by S&P 500 companies in 2019. The contraction came primarily from a 20% slump in cash acquisition spending and a 15% plunge in stock buybacks, the bank said.

At a high level, Goldman expects companies in 2020 to spend about 55% of their cash on growth while returning 45% to shareholders.

“We estimate cash return to shareholders will fall by 1% to $US1.2 trillion as a 5% decline in share repurchases more than offsets 5% growth in aggregate dividends,” Goldman wrote in a note to clients last week. “Investment for growth will rise by 4% to $US1.5 trillion.”

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Here are the five ways Goldman expects America’s largest companies to spend $US2.7 trillion of cash during 2020, in increasing order of size:


5. Cash mergers & acquisitions

Reuters

Estimated total: $US365 billion

Predicted change since last year: +6%

“S&P 500 cash M&A spending will increase by 6% to $US365 billion in 2020, supported by a 6% climb in operating EPS, ample cash balances, and credit markets that remain accessible to finance transactions,” the bank wrote.

Goldman added: “Low CEO confidence has historically been associated with greater appetite for acquisitions vs. investment for organic growth.”


4. Research & development

APPharma worker

Estimated total: $US380 billion

Predicted change since last year: +6%

“Spending on R&D is highly correlated with capex spending, but is less volatile,” the firm wrote in a note to clients.

Goldman continued: “R&D has only declined on a year/year basis during three years since 1990 (2002, 2003, and 2009). This experience suggests R&D spending is likely to continue to grow if the US economy avoids recession, as our economists expect.”


3. Dividends

Reuters

Estimated total: $US535

Predicted change since last year: +5%

“S&P 500 dividends will grow by 5% to $US535 billion in 2020, broadly in line with the 6% growth we expect in adjusted earnings,” Goldman said. “The payout ratio will remain mostly unchanged at 35% during 2020, in line with the 20-year average.”


2. Buybacks

Richard Drew/AP

Estimated total: $US675 billion

Predicted change since last year: -5%

“Aggregate buyback spending will slide by 5% during 2020 as companies pull back on cash return in an environment of heightened uncertainty,” Goldman wrote.

The firm added: “The conversation around the economics of share repurchases is likely to intensify during 2020 ahead of the US presidential election.”


1. Capex

Associated Press

Estimated total: $US745 billion

Predicted change since last year: +3%

“S&P 500 capex will grow by 3% during 2020, but most of the growth will be for ‘maintenance capex’ rather than ‘growth capex,'” the bank wrote.

Goldman continued: “A narrow output gap and elevated policy uncertainty suggest firms are likely to be more judicious about spending next year.”

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