High-Yield Firms’ Cash Falls 9% to $281B

Speculative-grade companies spent an amount equal to four times their discretionary cash flow on dividends and buybacks in 2014, says Moody's.
Matthew HellerJune 16, 2015
High-Yield Firms’ Cash Falls 9% to $281B

Cash holdings at speculative-grade companies fell 9% to $281 billion in 2014, reflecting growth in capital spending and heavy use of cash to fund dividends and share buybacks, according to a new report from Moody’s Investors Service.

Speculative-grade companies spent 397% of their discretionary cash flow on dividends and buybacks last year, against investment-grade companies’ 97%. Total returns to shareholders in the form of dividends and net share repurchases, for both investment- and noninvestment-grade companies, increased 23% to a record-high $683 billion.

At the end of 2014, though, investment-grade companies’ aggregate cash was up 9% on the prior year, to $1.4 trillion.

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“Steeper increases in capital spending at speculative-grade companies, as well as their heavier allocation of discretionary cash flow to acquisitions and shareholder returns, contributed to the divergence,” Moody’s Senior Vice President Richard Lane explained in a news release.

Total capital spending among speculative-grade companies increased 7.2% in 2014 to $223 billion, topping the 6% rise among investment-grade companies to $714 billion.

Spending on plant and equipment by all rated U.S. nonfinancial companies has increased every year since the Great Recession of 2009, averaging 9.7% annual growth, in excess of the 6.5% average growth in cash flow from operations during the same period.

Revenue, cash flow from operations, and EBITDA all grew faster at speculative-grade firms than at investment-grade companies in 2014, Moody’s said.

The speculative-grade sector has paid out more than its discretionary cash flow to shareholders for the last three years, partly supporting that through increased debt. Moody’s predicts a similar level of share buybacks in 2015 and says overall returns to shareholders among rated nonfinancial companies will reach about 100% of discretionary cash flow.

But driven by an estimated 30% reduction in the energy sector, aggregate capital expenditures are expected to decline by 10% to 12% in 2015, the first drop since the 18% decrease during the 2009 recession.