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The large cash balances accumulated by corporate America are now being used — both to reward shareholders through larger dividends and stock buybacks and to enhance their profitability through business reinvestment.

Corporate buybacks and capex have turned a corner chart

As we discuss in our accompanying piece, U.S. corporations are currently holding unprecedented amounts of cash on their balance sheets. The question is: How will companies spend these cash balances?

Three major ways that corporations can use their cash are for capital expenditure (capex), stock buybacks, and dividend payments. Through capex, corporations reinvest cash within the company to fund projects that are expected to expand capacity or improve productivity, thus enhancing future profitability. These investments in the business can be critical to the future success and growth prospects of the business.

Conversely, corporations can also use cash to reward current shareholders through purchasing company stock on the public market as a means to support the stock price and earnings per share by reducing the number of shares outstanding. Increasing dividend payouts can also help support a stock’s price, making it more attractive to own, particularly for investors who value income.

As illustrated above, both the share buyback and capex cycles appear to be back on track since bottoming last year. That’s good news for the economy and for corporate profits.

The bottom line? A rebound in capex spending should help to cushion the effect of a slowdown in consumer spending growth, while a resurgence in share buybacks and stronger dividend payouts are positives for equity investors.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis non-factual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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