nding corporate America’s investment drought; Capital expenditure relative to sales is at a 22-year low. CEOs must start to put record cash holdings to work

January 23, 2014 6:13 pm

Ending corporate America’s investment drought

CEOs must start to put record cash holdings to work

If 2014 is the year the US economy finally picks up speed, it ought to be the moment companies start investing. US non-financial companies are sitting on record levels of cash – almost $1.5tn. Alas, there is scant sign that chief executives are preparing to put their balance sheets to better use. The latest survey of non-financial companies in the S&P 500 index shows they are expected to boost capital expenditure by just 1.3 per cent for the year ending in June, according to Factset, a data company. This hardly looks like a vote of confidence in the US recovery. Unless companies show signs of stepping up their investments, there will be a question mark over its sustainability.

One piece of good news is that investors are increasingly demanding that chief executives put their cash to work. Until recently the pressure went the other way. Investors demanded share buybacks and companies complied. But the continued rise in US equity prices has made buybacks increasingly expensive. And investors, at least, appear to be regaining their animal spirits. In a Bank of America Merrill Lynch survey published on Tuesday, 58 per cent said they wanted companies to prioritise capital expenditure over other uses of cash flow, the highest number since the survey began in 2001. Their next step should be to punish risk-averse bosses by shifting money to more ambitious companies.

Washington should also do its part by showing it is serious about cleaning up the US corporate tax system. A large share of the non-financial cash mountain is held offshore by just five US tech companies – Cisco, Apple, Google, Oracle and Qualcomm. At $150bn, Apple’s cash reserves alone account for a 10th of the total. And a large share of the cash that chief executives have been returning to shareholders has been raised through the proceeds of debt in the domestic markets. This is tax arbitrage at its worst. US repatriated earnings are taxed at 35 per cent – the difference between what they pay abroad and at home, which is close to the highest headline rate in the world. That needs to change. Washington also needs to get rid of its generous tax subsidies on debt interest.

Third, US companies may be held back by fear of a continuing lack of demand in the economy. There is precious little they can do about this on their own. Paying employees more would help. So too would a rise in the federal minimum wage, which is near historic lows in real terms. But these will only assist at the margins. A better fiscal stance from Washington that took advantage of low borrowing costs to upgrade US infrastructure would also help. Politics makes that unlikely. A more plausible solution comes from John Delaney, a centrist Democrat from Maryland, who has submitted a bill that would give companies a partial tax holiday on any repatriated earnings they put into infrastructure bonds. Such imagination is in short supply in Washington. It should be rewarded.

Ultimately, there is no single fix for what has become a prolonged corporate investment strike. The remedies are manifold. But investors could do more to alter the misaligned incentives facing bosses. Remuneration based on stock price performance rewards chief executives who squeeze their companies for short-term returns. These must be rejigged. And bosses themselves must show more leadership. The problem is not unique to the US. Companies around the world held almost $7tn of cash and equivalents at the end of 2013 – more than twice the level of 10 years ago – according to Thomson Reuters. Capital expenditure relative to sales is at a 22-year low. The moment is long past due to ask why. Everyone, including investors and governments, will need to pitch in to reverse this trend.