Based on the data from FactSet, U.S. corporate performance metrics remain weak.
On the positive side, corporate cash balances were up 7.6% to USD1.54 trillion in 3Q 2016 y/y, for S&P500 (ex-financials) companies. This includes short term investments, as well as cash reserves. Cash balances are now at their highest since the data records started in 2007.
But, there’s been some bad news too:
- Top 20 companies now account for 52.5% of the total S&P500 cash holdings, up on 50.8% in 3Q 2015.
- Heaviest cash reserves are held by companies that favour off-shore holdings over repatriation of funds into the U.S., like Microsoft (USD136.9 billion, +37.8% y/y), Alphabet (USD83.1 billion, +14.1% y/y), Cisco (USD71 billion, +20.1% y/y), Oracle (USD68.4 billion, +22.3%) and Apple (USD67.2 billion, +61.4%). Per FactSet, “the Information Technology sector maintained the largest cash balance ($672.7 billion) at the end of the third quarter. The sector’s cash total made up 43.6% of the aggregate amount for the index, which was a jump from the 39.3% in Q3 2015”
- Despite hefty cash reserves, net debt to EBITDA ratio has reached a new high (see green line in the first chart below), busting records for the sixth consecutive quarter – up 9.9% y/y. Again, per FactSet, “at the end of Q3, net debt to EBITDA for the S&P 500 (Ex-Financials) increased to 1.88.” So growth in debt has once again outpaced growth in cash. “At the end of the third quarter, aggregate debt for the S&P 500 (Ex-Financials) index reached its highest total in at least ten years, at $4.57 trillion. This marked a 7.8% increase from the debt amount in Q3 2015.” which is nothing new, as in the last 12 quarters, growth in debt exceeded growth in cash in all but one quarter (an outlier of 4Q 2013). 3Q 2016 cash to debt ratio for the S&P 500 (Ex-Financials) was 33.7%, on par with 3Q 2015 and 5.2% below the average ratio over the past 12 quarters.
Net debt issuance is also a problem: 3Q 2016 posted 10th highest quarter in net debt issuance in 10 years, despite a steep rise in debt costs.
While investment picked up (ex-energy sector), a large share of investment activity remains within the M&As. “The amount of cash spent on assets acquired from acquisitions amounted to $85.7 billion in Q3, which was the fifth largest quarterly total in the past ten years. Looking at mergers and acquisitions for the United States, M&A volume slowed in the third quarter (August – October) compared to the same period a year ago, but deal value rose. The number of transactions fell 7.3% year-over-year to 3078, while the aggregate deal value of these transactions increased 23% to $564.2 billion.”
The above, of course, suggests that quality of the deals being done (at least on valuations side) remains relatively weak: larger deals signal higher risks for acquirers. This is confirmed by data from Bloomberg, which shows that 2016 median Ebitda Multiple for M&A deals of > USD 1 Billion has declined to x12.7 in 2016 from an all-time high in 2015 of x14.3. Still, 2016 multiple is the 5th highest on record. In part, this reduction in risk took place at the very top of M&As distribution, as the number of so-called mega-deals (> USD 10 billion) has fallen to 35 in 2016, compared to 51 in 2015 (all time record). However, 2016 was still the sixth highest mega-deal year in 20 years.
Overall, based on Bloomberg data, 2015 was the fourth highest M&A deals year since 1996.
So in summary:
- While cash flow is improving, leading to some positive developments on R&D investment and general capex (ex-energy);
- Debt levels are rising and they are rising faster than cash reserves and earnings;
- Much of investment continues to flow through M&A pipeline, and the quality of this pipeline is improving only marginally.