Weekly Headings – 24/08/2021

Key Takeaways

All sectors & industries investing in technology

Share repurchases reach a new post-COVID peak

Dividend growth critical given low interest rates

Expanding upon the insights we received from listening to 2Q earnings conference calls was the message that ‘cash is king.’ Unquestionably, record revenues, margins and earnings have highlighted the health of corporate America. One offshoot of this favorable earnings environment has been the building cash holdings on corporate balance sheets, which at $2 trillion is near record levels. After hoarding cash last year during the depths of the pandemic, the more robust economic outlook has companies looking to put some of that cash to use. The three most common uses of cash include: pursuing projects via capital expenditures, increasing dividends, or increasing buybacks. Each of these either improves the strategic long-term positioning of the company or provides shareholder-friendly actions. Below are some examples of specific activities being done by companies.

Banking On Technology Investment | Companies are ramping up capital expenditures, reflected in the elevated amount of business fixed investment over the last several quarters. But perhaps even more important than the decision to spend is what companies are choosing to allocate their dollars toward. The answer? Technology! In fact, technology spending accounts for ~20% of all business fixed investment, and the phrase ‘digital investment’ was mentioned nearly 1,000 times in earnings conference calls over the last six months. Microsoft highlighted that tech spending as a percentage of global GDP will double on the premise that “every business, whether a retailer, a manufacturer in service sector, public sector or private sector” needs digital adoption as a way “to be both resilient, as well as transform core business processes.” Their claim is validated by banks investing in fin-tech amid the digital revolution in banking (Capital One Financial, JP Morgan Chase), auto manufacturers ramping up spending for EV initiatives (Ford, General Motors), and food and household item distributors accelerating tech-based investments to automate processes and lower supply chain costs (Clorox, Tyson Foods).Bottom Line: This broad digital shift is here to stay, and so too is the continued investment in technology. In fact, ~23% of companies plan to make future tech-based expenditures—still near the highest levels in over the last decade.

Companies Coughing Up Coin For Shareholders | COVID-19 forced many firms to hold onto cash due to the uncertain business outlook, with some sectors and industries, such as Financials and airlines, restricted from deploying capital. As a result, buybacks fell to the lowest level since 2009 and ~50 S&P 500 companies were forced to suspend or cut their dividend. Now, companies such as Mastercard and UPS reaffirmed that such actions are a “priority” or “commitment” to shareholders, Target emphasized it will continue its decades long streak of increasing dividends with excess cash, and Advanced Auto Parts stressed that its actions (both dividend increases & buybacks) reinforced “confidence in future cash generation.”

Viewing Buybacks As The Most Bang For Their Buck | There was a remarkable ~$183 billion of share repurchases completed in the second quarter of this year—a new post-COVID peak. Although the Information Technology, Financials, and Communication Services sectors account for ~72% of this total, buybacks have been broad based, with 10 of the 11 S&P 500 sectors completing more repurchases relative to the second quarter of 2020. However, the Financials sector is the standout, purchasing the largest percentage of its market capitalization. At 1.2% (not annualized), the buyback yield of the Financials sector is at least double all other sectors! While not all sectors and industries have recovered to the level of share repurchases seen toward the end of 2019, the overall direction and improving trends is a market positive, especially given that 40+ companies, such as Apple, Constellation Brands, and McKesson plan to accelerate repurchases.

Investing Is Paying Dividends (Literally!) | During the second quarter, ~70 S&P 500 companies announced an increase to their dividends—a vastly different story than last year. Even more notable, over the last 12 months, ~285 companies raised their dividends, representing ~75% of S&P 500 companies that actually pay a dividend. Even some of the hardest hit companies during the pandemic (Macy’s, TJ Maxx, Kohl’s, Marathon Oil, Darden Restaurants, Weyerhauser) have re-instated their dividends after suspending them last year. In aggregate, dividend growth for the S&P 500 is on pace to rise 5.7% this year and is expected to accelerate to 8% in 2022, far better than the 2.0% decline in 2020.Bottom Line: An acceleration in shareholder-friendly actions is critical to our positive view on equities longer term.

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