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Apr 17, 2018

The Wall Street Journal | Money Beat: Cash Is Burning in Companies 'Pockets, April 17,2018.

The Wall Street Journal

Cash Is Burning a Hole in Companies’ Pockets

By Ben Eisen
Morning MoneyBeat is the Journal’s pre-market primer. To receive the newsletter via email, click here.
Market Snap at 04/17/2018 07:47:46 AM ET
S&P 500 Futures 0.45%
DJIA Futures 0.7%
U.S. 10 Year -4/32
WSJ Dollar Index 0.01%
Crude Oil 0.03%
Gold -0.37%
FTSE 100 0.05%
Nikkei 225 0.06%
DAX 0.72%
Hang Seng -0.83%
CAC 40 0.39%
Shanghai -1.41%

Overnight Developments

  • European and U.S. stock futures advanced on Tuesday amid strong corporate earnings results. S&P 500 futures pointed to an opening gain of 0.5%.
  • The Stoxx Europe 600 was recently up by 0.4%.
  • Earlier, Asian markets were under pressure after warnings from Western governments over a Chinese telecom giant. Hong Kong’s Hang Seng Index fell 0.8% and the startup-heavy ChiNext Price Index in Shenzhen shed 3%.
  • The Breakfast Briefing

    Companies are holding on to a ton of cash that could end up in shareholders' hands, one reason some investors are turning more optimistic about the stock market.
    S&P 500 companies, excluding financials, had $2.39 trillion in cash and investments in 2017, according to JPMorgan Chase & Co. researchers. That's up from $2.2 trillion in 2016 and $1.75 trillion in 2010.
    "No other time in history have companies held so much cash in a low rate environment," said the JPMorgan analysts, led by Dubravko Lakos-Bujas, in a research note.
    A lot of that could go towards buybacks as companies figure out what to do with their fatter profits and bring back overseas money as a result of the recent tax-code overhaul. The bill included a one-time tax on profits held abroad that was meant to encourage companies to bring their foreign profits back to the U.S.
    Buybacks were a significant force during much of the post-crisis stock rally, but they began to decline in the last few years as the economy strengthened and corporate profits accelerated. Now, the tax bill is reversing those expectations. Based on the amount of buybacks already announced this year by S&P 500 companies, JPMorgan analysts project roughly $800 billion in total buybacks in 2018, up from $530 billion last year.
    That means buybacks would once again underpin the stock market at a time when tensions are running high over geopolitical risks, a spring slowdown in global growth, and the possibility of heightened regulation in the technology industry. The S&P 500 is down 6.8% from its all-time high in late January.
    Because buybacks reduce the amount of a company's outstanding stock, lifting per-share earnings, they can make the remaining shares more valuable and increase stock prices. Others are critical of the practice, reasoning that it artificially inflates stock prices without delivering actual growth. That cash, they argue, is better invested in research and development and capital expenditures.
    The flurry of buyback program announcements this year hasn't necessarily translated into actual buyback executions yet. Securities rules typically prohibit companies from buying back their shares during the weeks leading up to their earnings reports. But if companies ultimately choose to spend their tax windfalls on buybacks, as they did during a tax repatriation holiday in 2004, it could turn out to be a crucial support for the stock market.
    Do you think there will be a buyback surge this year? Let the author know your thoughts at
    CORRECTION: Monday's Breakfast Briefing contained incorrect stock prices. JPMorgan shares declined 2.7% Friday, while Citigroup fell 1.6% and PNC shed 4.1%.

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