The great American corporate buyback party was expected to fizzle out next year, leaving a hangover of debt and remorse. Instead, the boom may soon find renewed succour if US companies bring their pile of foreign-based cash back home.
A tax holiday for US companies looms under president-elect Donald Trump, with some seeing this wave of cash as the catalyst of an investment boom and faster US economic growth. However, analysts and investors caution that the likeliest result is companies putting the money into share buybacks, echoing what happened in 2004 when the last overseas tax holiday was announced.
“It’s a big financial deal but I’m not sure it makes a difference economically,” Jim McCaughan, chief executive of Principal Global Investors’ asset management arm, says of the expected shift of the money. “I don’t think availability of funds has been a major issue for US capital investment.”
David Kostin, Goldman Sachs’ chief US equity strategist, estimates that corporate America will repatriate about $200bn of its foreign cash stash, and plough $150bn of this into ramped-up stock buyback programmes.
Such an outcome would lift next year’s buyback total by 30 per cent to a record-smashing $780bn. This would eclipse the $710bn Goldman forecasts that S&P 500 companies will spend on traditional investments, such as plants, shops and warehouses, for only the second time in two decades.
That prospect, combined with Mr Trump’s pledge to cut corporation tax, is already prompting investors to anticipate earnings per share will be nicely polished next year. JPMorgan Asset Management, for example, expects operating EPS across S&P 500 companies to climb to $134, up from an estimated $105 this year. They predict EPS of $117 next year without changes to corporate taxes.
Investors are beginning to price in the buyback party extending past midnight. PowerShares’ $1.4bn Buyback Achievers exchange traded funds, which tracks companies with generous buyouts, has gained more than 6 per cent since the US election, more than twice the broader market’s rally.
What form the tax overhaul will take remains uncertain. Mr Trump has proposed a 10 per cent mandatory tax on all accumulated earnings, while the Republican party in 2014 suggested a 8.75 per cent tax rate on overseas cash and short-term investments. Most expect an amalgam.
Earlier this year the congressional joint committee on taxation estimated the US company cash pile could amount to as much as $2.6tn. Analysts, however, say most of this is actually assets held to support companies’ foreign operations, with Goldman and Morgan Stanley putting the total overseas cash of the S&P 500 companies closer to $1tn.
There has been speculation that the repatriation of overseas cash might prove another tailwind for the resurgent dollar, but the vast majority of it is already held in the US currency, as companies have been loath to expose themselves to the fluctuations of the foreign exchange market. Morgan Stanley estimates that just 5 per cent of the total holdings are denominated in currencies other than the dollar.
Indeed, Luca Paolini, chief strategist at Pictet Asset Management, downplays the impact of repatriation on the dollar. “The positive side of this will be to get additional revenues to spend on infrastructure, more buybacks and M&A, but it will not make a big difference” to the currency, he says.
However, the repatriation of billions of dollars of overseas corporate deposits could rattle the global money market, where they constitute an important part of the offshore funding base.
Global short-term borrowing costs — exemplified by the London Interbank Offered Rate — have already climbed sharply this year due to reforms of the US money market fund industry, but the impact of cash repatriation could make this “look like baby stuff”, argues Credit Suisse’s Zoltan Pozsar.
The effect on other markets is more uncertain, especially when it comes to the corporate bond market. Some argue that repatriated profits will result in lower bond sales by companies, thereby tightening the risk premium or spread over government bond yields.
What is more, a big chunk of the overseas cash pile — as much as $230bn, according to Morgan Stanley — has been reinvested in corporate bonds, as companies have sought some returns on their reserves above the desultory rates offered by banks. Selling those to shift money back onshore could rattle the market.
Still, some analysts remain sceptical that much of the corporate cash pile will shift, even with a tax holiday of some kind, and see it more as a symptom of a financial system flushed with money thanks to easy global monetary policy.
“It has less to do with tax than that central banks have used a fire hose to water a dog,” argues Jim Paulsen, chief investment strategist at Wells Capital Management. “The dog can’t drink any more so the money just sloshes around.”
Additional reporting by Roger Blitz