Corporate America has been living beyond its means for too long…
If you’ve been reading the Dispatch, you know we’re living in very uncertain times.
Global interest rates are at their lowest level in 5,000 years. Global debt is spiraling out of control. And U.S. stocks are rallying despite serious problems.
After going nowhere for more than a year, U.S. stocks “broke out” earlier this summer. The S&P 500 is now trading near an all-time high.
Many investors are struggling to make sense of this.
After all, the global economy is stalling. Corporate earnings have been falling since 2014. And U.S. stocks are more expensive than they’ve been in nearly 15 years.
If anything, stocks should be falling…not trading at record highs.
• Corporate America has done everything it can to prop up the stock market…
Since the 2008–2009 financial crisis, U.S. companies have spent trillions of dollars on dividends and share buybacks.
A buyback is when a company buys its stock off the market. As we’ve said before, buybacks don’t make a company stronger or more efficient. But they can give a company’s stock a quick boost.
Dividends provide “instant satisfaction” too. They put money right into the hands of investors.
Companies know investors love dividends and buybacks. That’s why they've shelled out record amounts of them.
This made it easy for investors to overlook serious problems with the economy and financial system.
But those problems are now becoming too big to ignore.
As you’re about to see, many companies are going broke paying for dividends and buybacks. If this continues, the stock market could soon lose its biggest source of demand. And that’s something every investor needs to prepare for right now.
• Corporate America is struggling to make money…
Profits for companies in the S&P 500 have fallen the last five straight quarters. That hasn’t happened since the 2008–2009 financial crisis.
According to Bloomberg Business, corporate earnings before interest and taxes are now at the lowest level since 2011.
But this hasn’t stopped companies from paying record amounts of dividends and buybacks.
During the first half of the year, companies in the S&P 500 spent 112% of their profits on buybacks and dividends.
According to The Wall Street Journal, that’s well above the 82% ratio that companies in the S&P 500 have averaged over the last 15 years.
As you can see in the chart below, S&P 500 companies haven’t spent this much on dividends and buybacks since 2008.
• Corporate America is burning through cash to pay dividends and buybacks…
Bloomberg Business reported earlier this month:
Pressured by a year-and-a-half of weakening profits and splurges on buybacks and dividends, the once-towering piles of money at American companies have started to topple. Cash and equivalents slipped to a median $860 million at S&P 500 Index members last quarter, touching levels not seen for three years, according to data compiled by Bloomberg.
To be fair, companies in the S&P 500 (excluding banks) still have about $825 billion in cash on their books right now. That’s close to an all-time high.
On the surface, Corporate America looks like it’s flush with cash. But there’s a big problem. More than half of that cash belongs to just 50 companies, or 10% of the S&P 500.
The rest of the S&P 500 is starting to bleed cash. Bloomberg Business explained:
For the other 90 percent, balances are being reduced at the fastest rate since the start of the bull market. Total cash for that group was $385 billion in the second quarter, compared with $447 billion at the end of 2015 and down 10 percent from the year before, on pace with an 11 percent dip at the end of 2014 that was the biggest since 2009, Bloomberg data show.
Even some “cash-rich” companies are starting to burn through cash.
Google (GOOG) had 26% less cash at the end of last quarter than it did a year ago. Telecom giant AT&T’s (T) cash pile shrank 66% last quarter. Online auction company eBay’s (EBAY) cash holdings fell by about 24%.
• Right now, companies are raiding their coffers to keep paying buybacks and dividends…
This can’t go on forever.
To keep paying for dividends and buybacks, companies will either have to 1) make more money or 2) cut spending.
Neither option is easy.
According to research firm FactSet, Wall Street expects third-quarter earnings for the S&P 500 to decline 2.1%. This would be the sixth straight quarter that corporate earnings have fallen.
In other words, there’s no telling when this earnings drought will end.
• The other option is to cut spending…
Again, there’s a problem…
Since 2010, companies in the S&P 500 have increased spending buybacks by 232%. Spending on dividends is up 90% over the same period. Meanwhile, spending on capital expenditures (CapEx) has gone up just 59%.
CapEx includes spending on new equipment, machinery, and property, aka things that make companies stronger and more efficient.
Dividends and buybacks, on the other hand, don’t actually help companies grow. They only distribute money to investors.
In other words, Corporate America has already seriously cut back on actual business investment. That leaves dividends and buybacks….
• Companies are starting to spend less on dividends and buybacks…
Bloomberg Business reported last week:
Signs that companies are already growing weary of keeping up current levels of cash outlays are cropping up, with new buyback announcements down $115 billion since 2015 and dividend growth on pace for the worst year since 2010, according to Barclays Plc.
If earnings don’t pick up soon, more companies will have to cut back on dividends and buybacks.
And that could suck the air right out of the stock market.
According to investment bank Goldman Sachs (GS), buybacks have been the biggest driver of U.S. stock performance since the financial crisis.
Meanwhile, dividends have had more impact on stock performance lately than earnings. As we recently explained, that almost never happens.
• We encourage you to take steps to protect your wealth right now…
We recommend you hold more cash than usual.
Setting aside cash will help you avoid big losses if stocks crash.
We also encourage you to own physical gold. As we often remind readers, gold is real money. Unlike paper currencies, it’s survived every financial crisis in history.
If stocks fall, investors should pile into gold like they’ve done many times before.
• You could also protect yourself against a crash by shorting (betting against) stocks…
Right now, E.B. Tucker, editor of The Casey Report, is shorting some of America’s most vulnerable companies.
In February, E.B. shorted one of America’s weakest airlines. Five months later, he closed this trade for a 7% gain.
On September 8, E.B. shorted the same airline again. In less than two weeks, Casey Report readers are up 9% on this short. But they stand to make even bigger gains in the months ahead.
• You see, E.B. sees tough times ahead for the economy…
As the economy weakens, people will cut back on unnecessary expenses.
They’ll stop going out to eat as much. They’ll buy less jewelry. And they’ll take fewer vacations.
That’s bad news for the airline industry. It’s especially bad news for the airline E.B. shorted. He explained why in this month’s issue of The Casey Report.
According to Bloomberg, the company’s year-over-year revenue declined in all of the past six quarters. At the same time, its debt grew by 20%. Its cash position fell by 57% and it spent billions buying back its own stock.
• You can learn more about E.B.’s airline short by signing up for The Casey Report…
If you sign up today, you can access all of E.B.’s top ideas for just $99.
Frankly, this is one of the BEST deals you’ll find in our business. That’s because Casey Report readers have beat the market (S&P 500) 3-to-1 this year.
You can even test drive The Casey Report for two whole months to see if it’s right for you. Click here to learn more.
Chart of the Day
Corporate America is drowning in debt.
Today’s chart shows the cash-to-debt ratio of 2,000 U.S. corporations (minus America’s 25 most “cash rich” companies). This ratio compares how much cash a company has compared to debt. The higher the ratio, the better.
You can see this key ratio has been falling since 2010. Last year, it hit 12%. This means U.S. companies have just $0.12 of cash for every dollar of debt.
According to Standard & Poor’s, corporate balance sheets are the weakest they’ve been in at least a decade.
Dispatch readers know this is a serious problem…
As we’ve pointed out many times, Casey Research founder Doug Casey thinks a major financial storm is about to make landfall. He says it's “going to be much more severe, different, and longer lasting than what we saw in 2008 and 2009.”
According to E.B., this crisis has already quietly begun…
To learn why, watch this short presentation. It talks about a key warning sign that’s flashing in “an overlooked, little-understood market.” This same warning appeared before the savings and loan crisis of the 1980s…before the ’97 Asian financial crisis…and just before the 2000 tech crash.
By the end of E.B.’s presentation, you’ll understand why it’s never been more important to “crash proof” your money. Click here to watch this eye-opening video.
Delray Beach, Florida
September 20, 2016
We want to hear from you.
If you have a question or comment, please send it to [email protected]. We read every email that comes in, and we'll publish comments, questions, and answers that we think other readers will find useful.