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Companies From Google to Pepsi Are Boosting Capital Spending
Such expenditures among S&P 500 companies are growing faster than stock repurchases for the first time since early 2021
By Hannah Miao
The biggest U.S. companies keep stepping up their spending on capital projects, an encouraging signal to investors in an uncertain economic climate.
Companies from Google parent Alphabet Inc GOOG -0.26%▼. to General Motors Co. to PepsiCo Inc. are among those that have increased spending on big-ticket items, such as real estate, equipment or technology, to fuel growth. The investments are generally intended to expand the companies’ fast-growing operations or even optimize their inventory in the midst of a challenging business environment, according to executives.
Capital expenditures among companies in the S&P 500 have been growing at a faster pace than stock repurchases for the first time since the first quarter of 2021, according to data analyzed by S&P Dow Jones Indices from the second-quarter earnings season.
Based on results from roughly two-thirds of the companies in the index, capital expenditures have risen 20% from a year earlier to $149.8 billion, roughly in line with the first quarter’s growth rate. Meanwhile, share repurchases have climbed 10% to $160.8 billion and dividends have increased 14% to $140.6 billion.
The spending boom has offered a leg of support to a stock market that has been buffeted by worries about soaring inflation and the pace of the Federal Reserve’s campaign to raise interest rates. The S&P 500 has slumped 13% this year but has rebounded 13% from its low in mid-June.
“One reason that stocks haven’t absolutely fallen off a cliff right now is because of that increased capex,” said Ben Silverman, director of research at investment research firm VerityData. “There’s signaling from the executive suite that they’re comfortable spending money instead of hoarding cash.”
The latest round of corporate earnings reports have offered conflicting views about the economy’s trajectory and whether a recession is on the horizon. Inflationary pressures have driven up the costs of everything from food to fuel and raw materials, weighing on corporate profits and weakening consumers’ buying power.
Investors continue to parse mixed data about the health of the economy. Gross domestic product has contracted for two straight quarters, a common definition of a recession. Still, job gains remain strong, and the unemployment rate is holding steady. Investors are awaiting the latest reading on the labor market with July’s jobs report due Friday.
Meanwhile, Wall Street sentiment hit its lowest level in more than five years in July, according to Bank of America’s latest reading of sell-side strategists released this week. Extreme bearish sentiment is often a contrarian signal for a potential rally, the bank’s analysts said.
Companies in the information-technology, communications-services and industrials sectors have been the biggest contributors to capital-expenditure growth, according to a Bank of America analysis.
Alphabet, for one, reported last week that its second-quarter capital spending rose to $6.8 billion, up from $5.5 billion a year prior. The company said it is spending on technical infrastructure, particularly servers.
“With an uncertain global economic outlook, our strategy to invest in deep technology and computer science to build helpful products for the long term is the right one,” Chief Executive Sundar Pichai said on the company’s earnings call.
Likewise, GM’s capital spending climbed to $2.1 billion in the second quarter from $1.5 billion in the same period a year before. Chief Financial Officer Paul Jacobson, on GM’s earnings call, highlighted the auto maker’s push to expand its electric-vehicle fleet. “The investments we have made in these vehicles over the last couple of years…provide a strong bridge to our all-electric future,” he said.
PepsiCo finance chief Hugh Johnston pointed to digital investments to ensure stores are stocked with appropriate inventory as the beverage and snack company reported $1.5 billion in capital spending in the 24 weeks ended in mid-June, up from $1.3 billion during that period a year prior.
“If we have a series of earnings here where capital expenditures continue to be quite strong and companies are willing to spend that capital, that means they’re giving a pretty optimistic outlook for their business,” said Victoria Fernandez, chief market strategist and portfolio manager at Crossmark Global Investments.
Some of the growth in capital spending can be attributed to a restart in typical behavior after companies chose to stockpile cash during the depths of the Covid-19 pandemic.
Companies in the S&P 500 held about $1.667 trillion in cash and equivalents on their balance sheets at the end of the first quarter, down from $1.797 trillion at the end of 2021, according to S&P Dow Jones Indices. That figure excludes the financials, real estate, utilities and transportation sectors because those companies normally maintain high cash reserves.
Other companies are spending to bring production to the U.S. to stem persistent supply- chain challenges that have led to shipping delays and shortages of key products such as semiconductors. Mentions of “reshoring” during earnings conference calls have skyrocketed in 2022, according to Bank of America.
“That’s going to be a longer-term theme that reflects the reality that there’s a compelling opportunity to…manufacture and build in America,” said Rajesh Nakadi, head of investments at BNY Mellon Wealth Management Global Family Office.
Some companies are tightening their belts as they brace for a potential recession. Intel Corp., INTC -1.91%▼ for example, last week cut its capital spending forecast for the year. The chip maker reported a surprise quarterly loss and its biggest revenue decline in more than a decade, blaming a slump in personal-computer purchases and product delays.
Labor challenges have sparked an increase in investments in automation technology, according to investors and analysts.
Companies are still keeping plenty of cash on the sidelines, signaling some restraint in capital spending, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
“Is it a record?” asked Mr. Silverblatt of capital expenditures. “No, but they are good numbers. It’s definitely an up quarter despite concerns.”
