James Bevan: US corporate cash and overseas money
0Many US non-financial corporations (NFCs) have been accused by Donald Trump of destroying the US by moving operations abroad where labour costs less, thereby eliminating better paid jobs at home – but it’s easy to tar all with same brush, even if the data aren’t consistent with such an action.
We have more work to do but it’s interesting that we’ve written up the challenge that many US non-financial corporations (NFCs) have over-focused on share buybacks and not enough on capital investment and that’s still a key challenge. But the picture is more nuanced.
Thus we now have quarterly data in the Fed’s flow of funds accounts. The Fed’s data show that internal funds generated by NFCs has been in record territory, exceeding $1.8tn since Q3 2013. This income statement item includes after-tax profits less dividends and depreciation, along with a few adjustments.
Taxes paid as a percentage of pre-tax reported profits have increased from a recent low of 21.5% during Q4 2013 to 24.1% during Q4 2015, and dividends as a percentage of after-tax profits has been around 53.0% recently.
Financing gap
Interestingly, the Fed also compiles a series called “foreign earnings retained abroad”. It isn’t included in pre-tax reported profits, and it isn’t taxed in the US. It is included in the measure of internal funds. It has been hovering between 13% and 15% of total domestic and foreign pre-tax profits. As a percent of internal funds, it is currently around 12%.
The Fed’s data can be used to calculate NFCs’ financing gap as the difference between capital expenditures (including inventory investment) and internal funds, and during the current economic expansion, the financing gap has been much more negative than in the past as cash flow has well exceeded outlays.
Yet, despite all the net free cash flow, NFCs have been borrowing heavily in the bond market, with some of those proceeds being used to finance net buybacks, i.e., gross stock issuance less gross stock buybacks. However, net bond issuance has been relatively small compared to internal cash flow.
The Fed’s data reveal that in aggregate NFCs haven’t hoarded too much cash abroad to avoid taxes and haven’t borrowed too much to buy back their shares rather than invest.
Fixed investment has increasingly exceeded depreciation since 2010, and net fixed investment (on a four-quarter-sum basis) rose to a new record high of $609bn during Q4 2015, 32% above the previous cyclical peak at end 2007.
Tax issues
Meanwhile tax is an issue with rising prominence, and the Bernie Sanders/GAO analysis concluded that nearly 20% of large US corporations that reported a profit on their financial statements in 2012 ended up paying exactly nothing in US corporate income taxes.
Actually, most of these companies weren’t profitable in prior years, so they were allowed to use those losses to offset their 2012 taxable income. The IRS calls that the “net operating loss deduction.” We can wonder how much it cost to come up with this Government Accounting Office exposure. Maybe Bernie’s campaign fund can pick up the tab.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations.
You can follow James on twitter @jamesbevan_ccla
*CCLA is a supporter of Room151
