US Companies with Strong Earnings Favor Share Buybacks and Dividends Over Investment

Companies Hoarding Cash...Record-Breaking Scale of Share Buybacks

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] It has been revealed that U.S. companies are focusing on dividends and share buybacks even before the COVID-19 pandemic has ended. As the Joe Biden administration is pushing to secure large-scale infrastructure investment funds through corporate tax hikes, companies are expected to face criticism for prioritizing stock price support over investment.

The Wall Street Journal (WSJ) reported on the 16th (local time) that the total amount of share buybacks announced by U.S. companies this year up to the 8th has reached $504 billion (569 trillion won). This is the largest amount in the past 22 years for the same period. WSJ noted that more share buybacks are being made than in 2018, when the corporate tax cut issue was reflected in 2017.

Dividends are also soaring. Cash dividends of companies included in the S&P 500 and Dow Jones indices have surged to an annualized $20.3 billion, the highest since 2012.

Apple decided on a generous return of $90 billion, and Google $50 billion. Banks, which had suspended dividends and share buybacks last year, are also expanding shareholder returns. JP Morgan plans to buy back $30 billion of its own shares.

The rise in dividends and share buybacks is largely due to the surge in companies' cash holdings. Despite the COVID-19 pandemic, cash assets held by companies included in the S&P 500 soared to $1.89 trillion. This is because many companies have strong earnings, and those that reduced investment, dividends, and share buybacks last year are now pursuing business normalization.

Lori Calvasina, U.S. equity analyst at RBC Capital Markets Securities, explained, "As the negative impact of COVID-19 on business decreases and earnings improve, corporate executives are naturally increasing dividends and share buybacks."

On the other hand, companies investing in facilities remain a minority. RBC's analysis of the first-quarter earnings of 300 companies showed that about three times more funds were used for share buybacks and dividends compared to capital investment.

WSJ reported that controversy is once again brewing between voices calling for securing corporate competitiveness through capital expenditures and shareholder return policies through share buybacks and dividends.