American companies are draining their cash at the dumbest possible time

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Companies are sitting on a lot less cash than they were last year, in part because they’re spending it on share buybacks and corporate dividends.

While shareholders may be chuffed by that news, the slumping economy, surging interest rates and a credit crunch may mean US firms come to regret reducing their cash buffers.

The largest companies in the S&P 500 still have a decent stockpile of currency, but the decision to reward investors instead of paying down debt could mean corporations are overly focused on short-term stock gains.

What’s happening: A new report from Moody’s Investors Service finds that nonfinancial companies’ corporate cash declined 12% last year to $2 trillion.

The cash went toward rewarding investors: Share buybacks rose 31% and dividend payments were up 10% last year, found Emile El Nems, vice president for Moody’s Investors Service.

There was also a noteworthy 18% increase in capital expenditures — a long-term investment in business growth.

But debt was flat year over year, meaning that companies didn’t use much of their cash reserves to pay down outstanding loans. In fact, the tech sector accounted for the highest amount of cash held with 34% last year, but also the highest percentage of outstanding debt, with 12%, according to Moody’s.

Profit pressures on corporate borrowers are intensifying at a rapid pace as business costs remain elevated while consumer demand wanes amid the prospects of an economic downturn.

High borrowing costs because of the interest rate hikes by the Federal Reserve and an uncertain economic outlook means that credit is getting more expensive and harder to find. Recent turmoil in the mid-sized banking sector only exacerbated those problems.

“The global cost of capital is now significantly higher than in the last few years,” said Ben Lofthouse, head of global equity income at Janus Henderson. “When companies could essentially access finance at almost zero cost, there was a huge incentive to issue debt and buy back shares as this added immense value,” he said.

Now that it’s more expensive to borrow, companies in the US should consider the amount of money they’re spending on buybacks, he added.

“One would argue that in a higher rate environment, it’s more beneficial to keep cash on the balance sheet … because you can generate a decent return on your cash rather than burning a hole that will require you to go out and borrow money at higher rates ,” El Nems told Before the Bell.

Last year was a remarkably bad year for markets, with the S&P 500 dropping nearly 20%. If companies believed that there was a price mismatch in their stock value and their actual value, they would prioritize buying back shares of their own stock at a discount, he said.

Buyback announcements reached a new record of $1.22 trillion last year, and they’re on track to beat that high in 2023, according to Bank of America analysts. The S&P 500 is up more than 14% so far this year.

The rapid growth in buybacks is not a one-year phenomenon, either. Buybacks have almost tripled in value since 2012 (+182%), according to recent data from Janus Henderson.

Why it matters: Buybacks, critics say, are a tool that allows ultra-wealthy executives to manipulate markets while funneling corporate profits into their own pockets instead of the economy. Preventing companies from repurchasing their own shares, they argue, would free corporate cash to invest in growth and raise wages instead.

US President Joe Biden has called for a quadrupling of the tax on buybacks.

Corporations counter that they use repurchases as a way to efficiently distribute excess capital. Limiting buybacks, say supporters, could reduce the liquidity in stock markets and hurt share prices. Executives typically use buybacks to reduce the number of shares available for purchase, thereby increasing the demand for their stock and earnings per share.

Still, “buybacks cannot always be relied on to enhance shareholder returns,” said Lofthouse. “Their discretionary nature makes them more volatile — as evidenced in 2020’s Covid disruption when they fell dramatically.”

Ancient Greeks believed that Atlas held the world on his shoulders and Bank of America CEO Brian Moynihan believes that consumers hold the economy on theirs.

Moynihan has told CNN on multiple occasions over the last year that the continued strength of the US consumer is nearly single-handedly staving off recession in the US. Americans are still employed, they still have money in their bank accounts and they’re still spending that money, he has said.

But on Tuesday, the banking boss told CNN’s Poppy Harlow that he’s beginning to see some weakness there. Already, consumers are cutting back on spending to a level that is consistent with 2% inflation, Moynihan said, citing Bank of America customer data.

That’s both “good and bad,” he added. “Good [because] that’s what the Fed needs to see inflation under control. Not so good because that means we have a higher probability of a mild recession coming true,” he said.

He also said he believes the unemployment rate likely won’t exceed 5% during a recession.

However, Moynihan said that even consumers who keep their jobs will be affected by the downturn due to credit tightening. Borrowers deemed riskier could be denied a loan or charged a much higher interest rate compared to when the economy was in an expansion period.

Still, there may be some strength left: Spending at US retailers rose last month, in a sign that consumers are still fueling the economy.

Retail sales at stores, online and in restaurants grew 0.3% in May from April, the Commerce Department reported on Thursday. That’s above economists’ expectations of a 0.1% decline, according to Refinitiv.

Pickleball, America’s fastest-growing sport, is taking a toll on players’ wrists, legs and shoulders. And it’s especially popular with injury-prone seniors, which is driving up the cost burden, reports my colleague Nathaniel Meyersohn.

Pickleball injuries may cost Americans $377 million in health care costs this year, accounting for 5% to 10% of total unexpected medical costs, UBS analysts estimated in a report Monday.

“While we generally think of exercise as positively impacting health outcomes, the ‘can-do’ attitude of today’s seniors can pose greater risk in other areas such as sports injuries, leading to a greater number of orthopedic procedures,” the analysts said.

The analysts estimate that there will be around 67,000 emergency room visits, 366,000 outpatient visits and 9,000 outpatient surgeries related to pickleball injuries this year.

That’s a pretty big dill.

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