Cash is constantly flowing in and out of companies.
Profitable companies who are able to collect from their customers will watch cash pile up on their balance sheet unless they use it.
Public companies have five basic uses for the cash that they bring in: 1) share buybacks; 2) dividends; 3) acquisitions; 4) research and development; and 5) capital expenditures, which include spending on both growth and maintenance.
“S&P 500 companies are directing 40% of their cash usage back to shareholders compared to less than 30% in the late 1990s,” noted Goldman Sachs’ Stuart Kaiser in a new note to clients. “More than half of that amount (22%) has been devoted to buybacks while 18% has been used to pay dividends. Since 2010, dividend payments have grown nearly 50% while buybacks are up 40% on a trailing four quarter basis.”
Here’s Goldman’s outlook for cash outflows in 2014:
We forecast that both dividends and buybacks will grow by a further 10% in 2014. Corporate buyback activity is likely to remain robust but our previous analysis shows that this strategy is most effective when companies repurchase a large share (>5%) of market cap.
Many investors are underwhelmed with pace of growth in capital spending, R&D, and M&A despite each being 20% – 40% higher since 2010. We expect Capex and R&D growth to be muted in 2014 at 4% and 6% respectively but estimate cash M&A will rise by 13% next year. So far in 2013 M&A spending has been much weaker than anticipated which could argue for pent-up demand providing more growth next year or indicate that current conditions (low revenue growth, high policy uncertainty) are not conducive to those forms of spending. Regardless we expect cash usage will be skewed towards shareholder returns in 2014.
Here’s a chart breaking down cash use since 1998.