Cash grab: Companies plan to spend trillions soon

Investors eyeing the $1 trillion in cash that companies have stashed overseas out of reach from the long arm of Uncle Sam might grab a piece for themselves soon.

Companies are expected to spend $780 million buying back their stock next year, a 30% jump from 2016, as they bet President-elect Donald Trump will pass temporary tax breaks allowing companies to "repatriate" or bring back cash to U.S. shores, according to a report this week from Goldman Sachs. Stock buybacks are expected to be the largest way companies will spend the $2.6 trillion in excess cash they'll have next year if their expectations come to pass, says the report co-authored by Goldman chief U.S. equity strategist David Kostin.

Several major U.S. corporations — and their investors — could be large winners from a proposed tax break. Companies, excluding financials, in the S&P 500 have $2.3 trillion in cash and investments, according to a USA TODAY analysis of data from S&P Global Market Intelligence. Three technology firms, Apple (AAPL), Microsoft (MSFT) and Google parent Alphabet (GOOGL), are sitting on more cash than anyone, measured at $238 billion, $147 billion and $89 billion, respectively.

Understanding how companies will use their growing pile of cash, much of which is overseas, is of utmost importance to investors and workers.

Companies in the Standard & Poor's 500 will probably boost their cash spending by 12% next year. If the Republican-led Congress follows through on the one-time tax break that will allow U.S. companies to bring foreign profits back home, Much of the cash will find its way back into investors' pockets, Goldman says. Of the $200 billion expected to be brought back to the USA, $150 billion will probably go back to investors as stock buybacks. Additionally, Goldman estimates U.S. companies will leave $800 billion overseas even after the tax holiday.

Stock buybacks, in which companies use cash to buy their own stock to reduce the number of shares outstanding, can drive stock values higher by spreading profits over fewer shares. Companies have other competing demands for cash, including paying bigger dividends, investing in their operations or buying other firms.

Given the track record of companies in recent years and their behavior during a previous tax holiday in 2004 that allowed them to bring cash back to the USA without triggering a big tax, buybacks will win out, Goldman says.

"For only the second time in 20 years, buybacks will account for the largest share of total (Standard & Poor's) 500 cash use," the report says. Companies will probably bring back $200 billion of the $1 trillion they have stored overseas back home once more favorable tax breaks are approved. Much of the increase hinges on wide speculation that the Republican-controlled White House and Congress will move quickly to give U.S. companies a temporary tax in rules  passed in the second half of 2017, forecasts Goldman Sachs economist Alec Phillips.

Buybacks will grow much faster than the other uses of cash, Goldman says, if the tax holiday rules pass. Spending on capital improvements to companies' plants and equipment could rise just 6% to $710 billion, and research and development spending is likely to rise just 7% to $290 billion. Goldman sees cash spent on mergers and acquisitions rising a relatively meager 5% to $335 billion and dividends rising just 6% to $460 billion.

Proposed tax breaks for cash stored overseas are potentially a major shift in policy. Profits of U.S. companies stored overseas are taxed at 35% minus a credit to offset the foreign taxes paid when brought back. Tax rates of countries where U.S. companies stuff cash range from 12.5% in the popular haven of Ireland to 34% in France, Goldman says. House Republicans proposed a deeply discounted 8.75% tax on cash brought back to the USA.

Investors' wait to get their hands on some of this money could be nearing an end.

LARGEST CASH AND INVESTMENT BALANCES OF S&P 500 COMPANIES

Company, symbol, Cash and investments ($ millions) 

Apple, AAPL, $237,585

Microsoft, MSFT, $147,290

Alphabet, GOOGL, $88,761

Cisco Systems, CSCO, $70,968

Oracle, ORCL, $68,527

General Electric, GE, $56,960

Yahoo!, YHOO, $51,521

Coca-Cola, KO, $45,111

Aetna, AET, $43,286

Johnson & Johnson, JNJ, $41,012

Source: S&P Global Market Intelligence, USA TODAY

* As of latest balance sheet, excluding financials