The corporate tax cut put some $30 billion into the pockets of America’s largest companies in the first quarter. How’s it being spent?
Not necessarily the way President Donald Trump and Republicans said it would. They sold the cut as a means for companies to spur investment in America and create jobs.
But S&P 500 companies aren’t following through, at least not yet. Relative to cash flow, they are spending about what they always spent on such things as job-producing capital expenditures and shareholder goodies in the form of dividends and stock buybacks.
In short, as the charts below show, the pie is getting bigger but the slices are all the same proportions as before. That suggests the massive tax cut hasn’t changed corporate behavior so far. Caveat: It’s early.
Even before the tax law passed in December -- reducing corporate levies to 21 percent from 35 percent -- companies were expected to substantially increase spending on things like new factories, offices and equipment.
And that’s happening, with such spending by companies in the S&P 500 estimated to rise 18 percent this year to $641 billion.
That stat looks impressive and has garnered a lot of headlines. But that increase is about the same as in 2014. Moreover, the projected spending just about matches what companies allocated in the past three years as a percentage of their free cash flow -- about 43 percent. (Cash flow is a key measure of core profits.)
Of course, analyzing capex so soon is fraught. Major investments often take years to plan. Royal Caribbean’s capex is expected to surge more than 500 percent to $3.6 billion this year because it’s paying for cruise ships it ordered a decade ago.
Share repurchases by S&P 500 companies surged 34 percent to $178 billion, according to an analysis by Standard & Poor’s. But that spending accounted for 0.76 percent of the S&P 500’s market cap. That’s in line with the 5-year average of 0.72 percent.
In the first quarter companies boosted dividends by 8 percent to $116 billion. In percentage terms, though, it was little changed from the average of the previous four quarters -- about 46 percent of trailing 12-month free cash flow.