US companies are returning cash to shareholders at a record pace — and that’s fuelling everyone’s biggest fear about tax reform

  • Following the successful passage of Republicans’ new tax law, many parties across Wall Street were nervous about how US companies would use their excess cash.
  • Data from S&P Dow Jones Indices suggests their biggest fears are coming true, though some argue it may not be as big of a deal as previously thought.

When Republicans passed the new tax law,Wall Street was very vocal about what US corporations should do with the mountain of proceeds coming their way.

Favour your workers and sink money back into your businesses, observers said, worried that companies would instead spend the billions of dollars to boost their stock prices and reward shareholders.

If the latest figures are any indication, companies didn’t listen.

With a handful left to report, they have already set a new record for share buybacks, repurchasing $US178 billion worth in the first quarter of the year. On a trailing 12-month basis, corporations are now on pace to surpass $US1 trillion in combined buybacks and dividends for the first time, according to data compiled by S&P Dow Jones Indices.

Digging further into the numbers, companies have spent $US564 billion on buybacks and $US428 billion on dividends over the past year, totaling $US992 billion. If the remaining firms give that a slight boost, as S&P expects them to, it would mark the historic breach of the $US1 trillion threshold.

Upon first glance, this would seem to fuel Wall Street’s big fear about the new tax law. After all, $US1 trillion spent on shareholder enrichment is $US1 trillion not being pumped into capital expenditures and employee wages.

But Howard Silverblatt, a senior index analyst at S&P, has other ideas. He says corporations are so flush with money that they can comfortably cover all bases.

“Cash remains near or at its highs, giving companies the ability to do whatever they want,” he wrote in a report. And based on the record $US158.8 billion spent on capex in the first quarter, Silverblatt would seem to have a point.

On a broader basis, the way companies are deploying their tax-reform cash is a positive for the equity market. As stocks feel increased pressure from climbing Treasury yields and an expected slower pace of earnings growth, investors are likely to start seeking out companies that enrich shareholders.

Goldman Sachs is already on it, and it maintains an index of firms best positioned to return the most money to shareholders. You can read more about that here.

In the meantime, if you’re still feeling uneasy about how corporations are using their excess capital, allow Silverblatt’s data to put your mind at ease.