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Cash Balance Grows 5.5% in Second Quarter

By Andrew Birstingl, Research Analyst
Sep 24, 2015

The S&P 500 (ex-Financials) cash and short-term investments balance in the second quarter amounted to $1.43 trillion, which was the second highest level in 10 years. This amount reflected 5.5% growth on a year-over-year basis and 3.9% growth quarter-over-quarter. Seven out of nine sectors posted positive year-over-year growth, with the Consumer Discretionary (-0.8%) and Industrials (-0.9%) sectors being the only decliners.

The Information Technology sector had the largest cash balance ($546.3 billion) at the end of Q2, which has been the norm over the past 10 years. Five of the top 10 companies ranked by quarterly cash balance were in this sector: Microsoft ($96.5 billion), Google ($69.8 billion), Cisco Systems ($60.4 billion), Oracle ($54.4 billion), and Apple ($34.7 billion). In the second quarter, the Telecom and Utilities sectors led all groups in terms of year-over-year growth. The Telecom sector, which had the smallest average cash balance over 10 years, ended Q2 with $28.2 billion in cash, representing a 28.4% increase from the year ago quarter. The Utilities sector, which had the smallest cash balance at the end of Q2, ended the quarter with $27.2 billion in cash, which represented a 15.3% increase year-over-year.

Growth in the Telecom sector was primarily driven by two companies: AT&T and Frontier Communications. In Q2, AT&T sold $17.4 billion worth of bonds to help finance its $65 billion acquisition of DIRECTV, which closed on July 24, 2015. This was the third-largest corporate debt issue on record and helped to boost the company’s cash balance by $6.9 billion from the year ago period. Frontier Communications issued $2.6 billion in stock to help fund its $10.5 billion acquisition of Verizon’s wireline operations in select states, which was announced on February 5, 2015. This contributed to Frontier’s year-over-year cash balance growth of $2.3 billion. The cash balance in the Utilities sector was also buoyed by a large debt issuance. Exelon, the largest U.S. nuclear operator, raised $4.2 billion worth of debt in a bond sale that helped finance its purchase of Pepco Holdings.

77% of Companies in the Energy Sector Posted YoY Declines in CapEx

Capital expenditures totaled $153 billion in the second quarter, which represented a 5.6% decrease from the year ago period. This marked the largest year-over-year decline in CapEx since July 2010. In the past 20 quarters, Q2 2015 was only the second quarter in which the S&P 500 (ex-Financials) posted a year-over-year decline in CapEx.

At the sector level, the Energy, Industrials, Materials, and Telecom groups experienced negative CapEx growth in Q2 on a year-over-year basis. The Energy sector led the way with a 23.8% decrease, while the Industrials sector followed with a 13.5% decrease. Historically, companies in the Energy sector have spent the most on CapEx compared to any other group. By the end of the second quarter, the sector made up 26% of CapEx for the S&P 500 (ex-Financials). As a result, the Energy sector was the catalyst for the decline in CapEx for the index. Apache Corporation (-$1.9 billion), ConocoPhillips (-$1.8 billion), Exxon Mobil (-$1.4 billion), Chevron (-$1.3 billion), Occidental Petroleum (-$1.3 billion), and Anadarko Petroleum (-1.1 billion) were the main contributors to the decline, as each company cut CapEx by more than $1 billion from the year ago quarter. In fact, 77% of the companies in the Energy sector saw year-over-year decreases in capital expenditures in Q2.

Cuts to capital expenditures in the Energy sector occurred toward the end of 2014 and into the first quarter of 2015, as oil prices fell to levels not seen since 2009. As a result, some of the biggest energy names, like Chevron and Exxon, announced cuts to their capital spending and were forced to reassess the costs and benefits of their current and upcoming projects. In Q2, WTI crude oil and Brent crude oil made back some of their losses, but as of yesterday’s close, the commodities were down 51.2% and 49.1% since the start of Q4 2014, respectively.

At the other end of the spectrum, the Consumer Discretionary sector led all groups in CapEx growth in Q2, with an 18.1% increase from the year ago quarter. General Motors, which reported the third highest amount in CapEx, was one of the primary drivers of this sector’s growth. In the beginning of 2015, GM announced a plan that would raise its CapEx to $9 billion for the year. Much of this budget was to be spent on boosting the Cadillac brand and boosting sales in China.

Less Severe Cuts to Capital Spending Predicted for the Next 12 Months

In the next 12 months (NTM), analysts are still predicting year-over-year declines in CapEx for both the Energy sector and the S&P 500 (ex-Financials) as a whole. However, these declines are not as severe as those seen in the second quarter. Aggregate CapEx for the index (ex-Financials) is projected to drop 1.3% in the NTM compared to the year ago period, while the Energy sector looks to be headed for a 9.5% decline. The Energy, Materials, and Telecom sectors are the only three sectors estimated to report reductions in capital expenditures on a year-over-year basis. The Information Technology sector is forecasted to have the highest growth rate (+5.2%).

CapEx estimates for the rolling next 12 months have changed historically. Since the second quarter of 2014, analysts’ outlooks on CapEx spending have been bearish, especially for the Energy sector, as shown in the steep decline over the past year. Looking at estimates for 2015, analysts predicted year-over-year declines of 1.5% and 7.5% for the S&P 500 (ex-Financials) and the Energy sector, as of the end of 2014. Those declines have since steepened, as projected cuts to CapEx spending as of yesterday’s close stood at 2.9% and 21.9%, respectively. However, these forecasted cuts are still not as severe the year-over-year reductions in CapEx seen in Q2.

Operating Cash Flow Grows 1.7%, While Free Cash Flow Grows 8.3%

S&P 500 (ex-Financials) companies generated $335.4 billion in operating cash flow (OCF) in Q2, which represented year-over-year growth of 1.7%. This marked the seventh highest quarterly OCF total in the past 10 years. After subtracting fixed capital expenditures, aggregate free cash flow amounted to $182.4 billion, which reflected an 8.3% growth rate year-over-year.

At the sector level, six of the nine sectors showed year-over-year increases in operating cash flow, with the Utilities, Telecom, Industrials, and Consumer Discretionary sectors each posting double-digit growth. The Utilities and Telecom sectors led the way with increases of 27% and 13.6%, respectively. On the other hand, the Energy, Materials, and Information Technology sectors experienced declines, with the Energy sector (-21%) leading the fall. A major contributing factor to this decline was the large decrease in sales at many of these energy companies in Q2 compared to the year ago quarter. In dollar amounts, the bottom five companies in the S&P 500 (ex-Financials) ranked by year-over-year decrease in sales were all in the Energy sector. Facing an environment with lower oil prices, Phillips 66, Valero, and Marathon Petroleum each reported sales declines in excess of $6 billion, while Exxon and Chevron posted declines of $32.9 billion and $18.7 billion, respectively.

The Energy sector, however, posted double-digit growth in free cash flow, mostly due to deep capital expenditures cuts made by energy companies recently. The Industrials sector, which faced the second largest CapEx cut year-over-year, also posted double-digit growth in free cash flow. The Materials and Information Technology sectors were the only groups to post year-over-year declines in FCF in Q2.

Research and Development Spending Hits a 10-Year High

As mentioned earlier in this report, companies in the S&P 500 (ex-Financials) decreased their spending on fixed assets in Q2. However, it looks like many of them may have invested their capital elsewhere. Aggregate spending on research and development reached at least a 10-year high in Q2, amounting to $55.4 billion for the quarter, and $255.2 billion over the trailing 12-months. The Information Technology, Consumer Discretionary, and Health Care sectors were the dominant groups in terms of R&D spending, with the top 10 companies by TTM R&D expenses coming from these sectors. Microsoft ($12.1 billion) and Intel ($11.8 billion) topped the list for aggregate R&D spending on a TTM basis, while  Amazon (+$3 billion) and Google (+$2.5 billion) led growth in year-over-year spending. Although the top R&D spenders seem to be consolidated in these three sectors, it is important to note that eight out of the nine sectors saw increases in TTM R&D expenses on a year-over-basis. The Materials sector was the only group that experienced a decline.

The aggregate trailing 12-month R&D expenses to Sales ratio for the S&P 500 (Ex-Financials) stood at 7.1% at the end of Q2, which reflected the second highest ratio in 10 years. The second quarter marked the 15th consecutive quarter that the ratio exceeded its 10-year average of 6.3% on a TTM basis.

Apple Spends $13 billion on Shareholder Distributions

Shareholder distributions in the form of dividends and the repurchase of stock amounted to $175.6
billion in Q2, which represented a 5.1% increase year-over-year. However, on a sequential basis, Q2 marked the 3rd consecutive quarter in which aggregate shareholder distributions for the S&P 500 (ex-Financials) decreased. This in part is due to the 6.9% quarter-over-quarter decline in the dollar value of share buybacks in the second quarter. On the other hand, the aggregate amount of dividends paid in Q2 climbed to a new 10-year high, totaling $87.3 billion. At the company level, Apple led the S&P 500 in terms of shareholder distributions, with over $13 billion being spent in dividend payouts and stock purchases. This amount was almost double the total of the next highest company (Microsoft). Apple bought back $10 billion worth of shares in Q2, more than any other company in the index, and paid out $3.05 billion in dividends, just below the quarterly dividend amount of Exxon. 

Cash Flows from Net Debt Issuance Continue to Rise

On the debt financing side, cash inflows from net debt issuance were positive for the 20th consecutive quarter. They have not been negative since July 2010. The aggregate cash flows from net debt issuance amounted to $118.3 billion in Q2, which was the second highest quarter-end amount in at least 10 years. The highest aggregate amount was in Q1 2015, when levels hit $148.8 billion. 

AbbVie and AT&T topped the list of companies in terms of net debt issued, while General Electric and Merck led companies in net debt reduction. AbbVie, a research-based biopharmaceutical company issued $16.7 billion in new bonds in mid-May to finance its acquisition of Pharmacyclics, which was worth $18.6 billion. This issue was the main driver of the firm’s net debt issuance of approximately $16 billion. As mentioned earlier in this report, AT&T sold $17.4 billion worth of bonds in Q2 to finance its $65 billion acquisition of DIRECTV. This heavily contributed to the company’s $15.1 billion in net debt issuance. In terms of debt reduction, General Electric and Merck repaid debt amounts in the second quarter totaling $12.4 billion and $3.7 billion, respectively.

Other Investing Activities

Unlike the equity and debt issues mentioned above, other investing activities were a drain on cash balances in the second quarter. Cash flows from the sale of assets decreased by 29.2% from the year ago period, and only amounted to 83.3% of the 10-year quarterly average. Chevron went against this trend as it divested $3.9 billion worth of business assets in Q2.

Companies in the S&P 500 purchased more investment securities than they sold for the 6th consecutive quarter and for 27 out of the past 30 quarters. Cash outflows from the net purchase of investment securities increased 52.8% year-over-year. Reynolds American led the purchases of investment securities with $17.2 billion in cash outflows in Q2, as the cigarette manufacturer closed on its acquisition of Lorillard. Additional cash outflows came from assets acquired from acquisitions, which saw Q2 cash outflows increase 55.6% year-over-year. These outflows were led by AbbVie, which acquired $11.5 billion in assets from the acquisition of Pharmacyclics.

Read more about S&P 500 companies' trends in corporate cash balances in this quarter's edition of FactSet Cash & Investment Quarterly. Visit www.factset.com/cashinvestment to launch the latest report.

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