Despite the strong start, concern remains among retail investors and portfolio managers that chief financial officers remain too fixated on returning cash to shareholders through stock buybacks and dividends. (
) Such moves have been key to pumping up the market off the 2009 recession lows, but they've raised concern that corporate cash could be spent better elsewhere.
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Companies are holding just shy of $2 trillion in cash domestically and about $2.2 trillion in overseas accounts. Over the past five years, companies have committed some $2 trillion to share buybacks while M&A and other investments have been well below trend, according to Goldman Sachs.
Goldman strategists believe the difference between what companies should do and what they will do remains substantial.
"We recognize activist investors often advocate for firms to return excess cash to shareholders via buybacks," Goldman's chief strategist David J. Kostin and others said in a note to clients. "Tactically, repurchases may lift share prices in the near term, but in our view it is a questionable use of cash at the current time when the P/E multiple of the market is so high."
The note also points out that buybacks often peak at market highs and trough at lows, pointing specifically to the $637 billion bought in 2007 before the S&P 500 tumbled 40 percent, while companies bought just $146 billion when stocks bottomed in 2009.
The buyback trend is popular among activist investors, particularly those who take short-term positions in companies. However, even longer-term activists like Carl Icahn push hard for them—in Icahn's case his well-publicized and successful battle to get Apple to buy back its shares.
Kostin's team has a generally bullish market view but sees the index already past the level where it will end the year—Goldman has a 2,100 target though it says 2,150 is possible before a pullback occurs.
"Although buybacks do not represent an optimal use of cash at the current time, they will be positive for near-term stock performance," the note said.
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Investors, though, likely will continue to demand changes in cash allocations for the future, particularly with valuations near all-time highs when accounting for the bargain-basement interest rates that are about to rise.
Capital investment broadly has been anemic in the post-financial crisis environment, with dividends and buybacks accounting for 36 percent of operating cash flow over the past decade, while capital expenditures have fallen from 29 percent to 23 percent, according to figures Barron's cited.
"So what has happened this cycle is that we have witnessed the weakest growth rate in the private sector capital stock in the post (World War II) era, and now we are paying the price in back-to-back productivity declines, which is rare outside recessions," David Rosenberg, senior economist and strategist at Gluskin Sheff, said in his daily note Monday. "There is a time-worn link with profit margins, so something tells me that organic movement in capex growth is going to become increasingly important for the typical CEO."