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According to Goldman Sachs, the forecasted increase in 2020 stands in contrast to the expected 6% decline in spending by S&P 500 companies in 2019.
The report predicts that cash spending will rise by around 2% in the next year amid a rise in growth investments.
The bank however claims that there will be a 6% decline in spending by S&P 500 companies this year. This shrinking comes because of the 20% slump in cash acquisition spending and a 15% decrease in stock buybacks.
Still, Goldman experts believe companies in the next year will spend around 55% of their cash on growth and return 45% to shareholders.
In their note to clients the company says:
“We estimate cash return to shareholders will fall by 1% to $1.2 trillion as a 5% decline in share repurchases more than offsets 5% growth in aggregate dividends. Investment for growth will rise by 4% to $1.5 trillion.”
There are five ways Goldman expects the biggest US companies to spend $2.7 trillion of cash during 2020, in increasing order of size.
The first one is through cash mergers and acquisitions where the estimated total is $365 billion and predicted change since last year includes a rise of 6%.
“S&P 500 cash M&A spending will increase by 6% to $365 billion in 2020, supported by a 6% climb in operating EPS, ample cash balances, and credit markets that remain accessible to finance transactions. Low CEO confidence has historically been associated with greater appetite for acquisitions vs. investment for organic growth.”
The second way is through development and research where there is also 6% rise expected and total estimated counts of $380 billion.
“Spending on R&D is highly correlated with capex spending, but is less volatile. R&D has only declined on a year/year basis during three years since 1990 (2002, 2003, and 2009). This experience suggests R&D spending is likely to continue to grow if the US economy avoids recession, as our economists expect,” explained the company.
The third option presupposes dividends. According to Goldman, “S&P 500 dividends will grow by 5% to $535 billion in 2020, broadly in line with the 6% growth we expect in adjusted earnings. The payout ratio will remain mostly unchanged at 35% during 2020, in line with the 20-year average.”
On the fourth place comes buyback and the company predicts aggregate buyback spending will slide by 5% during 2020 as companies pull back on cash return in an environment of heightened uncertainty.
And, at last, and as one of the most important, Goldman Sachs calls capital expenditures. They said:
“S&P 500 capex will grow by 3% during 2020, but most of the growth will be for ‘maintenance capex’ rather than ‘growth capex. A narrow output gap and elevated policy uncertainty suggest firms are likely to be more judicious about spending next year.”
However, a few days ago, Goldman Sachs analyst David Kostin warned that the trade war, certain geopolitical uncertainty, and the soon-to-come U.S. presidential election reflected widely on business sentiment, and that trend will keep being the dominant narrative this year.
However, even though there are some positive signs, there is still no tariff resolution in sight, so Kostin predicts that cash spending for S&P 500 firms will decline by about 6% for the full year what would make the stiffest annual plunge since 2009.