Blue Chip America Mints Money to Spend on Growth, Dividends
July 30 (Bloomberg) -- The $1.24 trillion in cash sitting in U.S. companies’ coffers may soon be going back to work to stimulate the economy.
Standard & Poor’s 500 Index members are starting to open the purse strings on spending. In addition to raising dividends and doling out billions for stock buybacks, Corporate America’s mint is building Wynn Resorts Ltd. nightclubs, developing Caterpillar Inc. mining trucks, creating new Quaker oatmeal and funding Walt Disney Co.’s acquisitions.
“There’s a lot of pressure on companies to ramp up the revenue line,” said John Carey, 61, a Boston-based money manager at Pioneer Investment Management, which oversees about $230 billion. “They have pretty much done everything they can on the cost-cutting side so they’ve got to spend more in order to sell more.”
Increased spending may help lift the momentum of the recovery following the worst recession since the 1930s. Capital expenditures rose an average 11 percent for non-financial companies in the most recent quarter for which figures were available, according to data compiled by Bloomberg, as declines in advertising and research and development narrowed.
“Free cash flow,” which measures money generated beyond capital spending, climbed to about $139 billion for those companies, Bloomberg data show, and some plan to use the money for share repurchases and dividend increases.
Dividends, Share Repurchase
Colgate-Palmolive Co.’s free cash flow before dividends climbed 9.7 percent to $1.1 billion in the six months through June, the New York-based company said yesterday. Microsoft Corp. had $4.85 billion in the quarter through June 30, up 63 percent from a year earlier, and Bloomberg data suggests the Redmond, Washington-based software maker may raise its dividend by 2 cents to 15 cents, the first increase since 2008.
Disposable medical-supply maker Becton, Dickinson & Co. said yesterday it would raise share repurchases to $700 million from $550 million after the Franklin Lakes, New Jersey-based company’s free cash flow grew 33 percent to $174 million in the three months through March. 3M Co. said its free cash flow in the quarter through June was $958 million.
Still, the economic recovery -- and the new round of corporate spending -- isn’t yet generating job growth in the U.S. or spurring consumer purchases.
Payrolls at non-financial companies dropped 3.75 percent in 2009. Unemployment reached a 26-year high of 10.1 percent in October before settling at 9.5 percent in June, as companies delayed hiring to gauge the effect of new health-care and financial regulations and determine whether demand warrants increasing production.
‘Gloomthink’ Ebbing
“There’s kind of a little bit of a gloomthink that’s gone on out there,” said Jeffrey Sprague, co-founder of Stamford, Connecticut-based Vertical Research Partners. “People don’t want to be overly optimistic, then appear naïve or foolish, but you can really tell by the tone of what’s going on in these businesses that in fact the confidence in recovery and the confidence in the logic of spending a little bit more capital for growth is clearly increasing.”
Caterpillar, which is based in Peoria, Illinois, and is the world’s largest maker of construction equipment, is paying $820 million for rail and transit company Electro-Motive Diesel and investing $700 million on developing mining trucks and hydraulic shovels.
“Shareholders don’t typically like companies that sit on a lot of cash, so we’ll put that to work,” Chief Executive Officer Doug Oberhelman told Bloomberg Television on July 22.
Intel Research
He’s not alone. Intel Corp., the biggest chipmaker, added $200 million to its 2010 research budget and as much as $400 million to its plans for equipment spending this month, for a total of as much as $12 billion. 3M, the St. Paul, Minnesota- based maker of products from stethoscopes to sandpaper, plans about $1 billion in capital spending this year, up 11 percent from a year earlier.
Manufacturing companies should invest in production facilities and capacity so that they are ready to meet increases in demand, executives and analysts said.
“Otherwise, we’ll stifle growth as capacity, not demand, becomes the new choke point,” 3M CEO George Buckley said on a conference call.
Web companies also lifted budgets. Amazon.com, the biggest online retailer, boosted capital spending to a record $196 million last quarter as the Seattle-based company built warehouses and expanded data centers.
‘Billion-Dollar Opportunities’
Google Inc., owner of the world’s most popular search engine, is investing in new business opportunities including mobile-phone software and graphical advertising. Research and development costs rose 27 percent to $898 million in the second- quarter from the year-ago period.
“We have to continue to invest in what are billion-dollar opportunities,” Patrick Pichette, the Mountain View, California-based company’s finance chief, said in an interview.
Capital expenditures among non-financial S&P companies increased an average 11 percent from a year earlier to about $96 billion in the most recently reported quarter, Bloomberg data show. That compares with an average decline of 3.5 percent from a year earlier in the previous quarter.
The companies’ $1.24 trillion in cash and short-term investments is up about 5 percent from the end of 2009 and 16 percent from the end of 2008.
‘Signs of Confidence’
“There are a number of signs of confidence on the part of business,” Pioneer money manager Carey said. “We’ve seen dividend increases, share repurchase, merger and acquisition activity, and with respect to operational spending, we’ve seen increased advertising.”
General Electric Co., based in Fairfield, Connecticut, last week raised its quarterly dividend by 20 percent and said it will resume stock buybacks sooner than officials had predicted. KLA-Tencor Corp., a Milpitas, California-based maker of chip- production equipment, this month increased its quarterly dividend by two-thirds, to 25 cents a share from 15 cents.
Disney agreed to buy Playdom Inc. for as much as $763.2 million, acquiring the second-biggest maker of games played on Facebook and MySpace websites and extending its drive into online and mobile games. Earlier this month, Burbank, California-based Disney bought Tapulous Inc., a developer of music-related games for Apple Inc.’s iPod and iPad.
UnitedHealth Group Inc., based in Minnetonka, Minnesota, is nearing a deal to buy medical services firm Executive Health Resources Inc. for about $1.5 billion, three people with knowledge of the talks said this week.
‘Capacity Bottlenecks’
Companies are spending “where there is demand for product, where there are capacity bottlenecks,” said Brian Barish, president of Denver, Colorado-based Cambiar Investors LLC, which has $5.5 billion under management. “Where companies are being more cautious is where you need to meet fairly large leap-of- faith, leap-of-optimism type of expectations.”
The U.S. Commerce Department may report today that the economy expanded 2.6 percent in the three months through June, down from 2.7 percent in the first quarter. Consumer confidence fell to a five-month low in July, partly because of unemployment.
The U.S. has lost about 7.5 million non-farm payroll jobs since December 2007, the start of a recession whose end date has yet to be declared officially. While the number of private- sector jobs increased each month this year, the total of 107.7 million is about the same as in February 1999.
“Corporate balance sheets are in pretty good shape,” Kurt Kuehn, chief financial officer at United Parcel Service Inc., said in a July 22 interview. “The consumer is another question. The more attached to consumers you are, the more risk you may be feeling as a company.”
New Tractors, Jets
UPS, the world’s largest package-delivery company, cut capital spending by about 50 percent in the first half of 2009 from the same period of 2008.
This year, the company is buying 300 new tractors for its freight unit, taking delivery of three new Boeing Co. 767 freighter jets and adding “telematics” data-capture technology to 10,000 signature brown delivery trucks, said Norman Black, a company spokesman.
At FedEx Corp., which operates the largest air-cargo fleet, capital expenditures will be $3.2 billion for the year that started in June, up about 14 percent, with about two-thirds of that going toward growth initiatives such as new jets, the Memphis, Tennessee-based company said in a July 15 regulatory filing.
Some companies are now trying to jumpstart consumer spending by new offerings.
Blackjack, Dancing
Wynn Resorts is betting $68 million that a poolside club offering blackjack, dancing and sunbathing on daybeds with private safes will lure big-spending partygoers to its Encore Las Vegas casino resort. Opened Memorial Day weekend, Encore Beach Club and Surrender Nightclub also have cabanas with flat- screen TVS and refrigerators, and bungalows with hot tubs.
The Las Vegas-based company also plans to invest $80 million remodeling all 2,716 rooms and suites at the Wynn Resort, which is adjacent to Encore on the Las Vegas Strip and opened in 2005.
Pepsico Inc. plans to spend more starting this year to innovate and improve quality at its Quaker Foods line, starting with the texture of oatmeal, CFO Hugh Johnston said on a July 20 earnings call. The revamp will include salt and sugar reductions, a new multigrain oatmeal for adults and Kids Creations for the youth market, he said.
PepsiCo’s net capital expenditures are projected to increase to $3.6 billion this year after the Purchase, New York- based company tightened them 13 percent to $2.13 billion in 2009. The company is focusing on new products and expansion in emerging markets such as China.
‘You Weren’t Ready’
Corporate spending is “consistent with the early phases of the economic expansion where not every single data point is pointing straight up,” Cambiar Investors’ Barish said.
Executives want to make sure their businesses are prepared to meet demand so that potential revenue isn’t blocked by cost- cutting measures of the past two years.
“If you just went through a terrible 18-month recession and you didn’t have any orders and your sales were depressed, the last thing you want to do is all of a sudden figure that demand has recovered and you can’t ship stuff because you weren’t ready and the order is going to your competitor,” Vertical Research’s Sprague said. |
