cash & investment quarterly - Factset

Michael Amenta, Research Analyst [email protected] Media Questions/Requests [email protected]

CASH & INVESTMENT QUARTERLY

September 26, 2012

S&P 500 ex-Financials

Key Metrics: + Aggregate Cash: S&P 500 cash and marketable securities balances grew 3.6% year-over-year to a

balance of $1.19 trillion at the end of Q2 2012. However, cash actually fell by $24.3 billion quarterover-quarter. The Q2 2012 quarter marked the first quarter that cash balances declined sequentially since Q2 2010. + Free Cash Flow: Cash flows from operations amounted to $290.8 billion in Q2 2012, which marks a

decline of 1.3% year-over-year. Due to an increase in year-over-year capital expenditures (13.7%), free cash flow to equity declined even further (-12.8%). Only three sectors showed increases to free cash flow to equity, Telecommunications Services (42.6%), Information Technology (6.0%), and Health Care (2.1%). + Other Investing Activities: Other investing activities were also a drain on cash balances in Q2 2012.

Cash flows from the sale of assets increased by 29.9% year-over-year but only amounted to 60.0% of the ten-year quarterly average. In addition, companies purchased more investment securities than they sold for the second consecutive quarter, and assets acquired from acquisitions in Q2 2012 marked the third highest quarterly total in ten years. + Financing Activities: Cash flows from financing activities were mixed in Q2 2012.

Shareholder distributions in the form of dividends and the repurchase of stock increased 15.2% sequentially and 5.1% year-over-year, but cash inflows from debt issuance were positive for the eighth straight quarter. Quarterly Cash & Short-Term Investments – S&P 500 (Ex-Financials)

45 1,200,000 40 1,100,000 35 1,000,000 30 900,000 25 800,000 20 700,000 15 600,000 10 500,000 '03

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Cash & Short-Term Investments (Ex-Financials)

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'12

Cash to Debt Source: FactSet Fundamentals via FactSet Alpha Testing

Cash & Investments Quarterly is one part of three reports (Buyback Quarterly and Dividend Quarterly) analyzing cash and discretionary spending within US large-cap companies. The other reports can be found at http://www.factset.com/insight or within the FactSet Market News application of your FactSet workstation. All data published in this report is available on FactSet. Please contact [email protected] of 1-877-FACTSET for more information.

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Copyright © 2012 FactSet Research Systems Inc. All rights reserved.

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September 26, 2012

Aggregate Cash Balance Falls for First Time in Two Years Cash & short-term investment balances fell by $24.3 billion (2.0%) sequentially and settled at a balance of $1.19 trillion for Q2 2012. On a year-over-year basis, cash growth of 3.6% marked the fourth consecutive quarter of single-digit growth and the slowest year-over-year growth since Q3 2008. As previously reported in “Cash & Investment Quarterly”, cash balances accelerated rapidly in the period from Q4 2008 to Q3 2011, but have slowed since. Much of the rapid growth was due to isolated sectors—the Information Technology, Industrials, and Health Care sectors’ cash growth amounted to 85.5% of total index-wide (ex-Financials) growth. However, the trend does not appear to be continuing within these sectors. In Q2 2012, the two sectors showing year-over-year declines in cash balances were Health Care (-4.6%) and Industrials (-1.9%), and the Information Technology and Health Care sectors were among five of the nine sectors showing a sequential decline in cash (-1.1% and -11.2%, respectively). As a result of decelerating cash flows and increased debt issuance, aggregate cash to debt ratios have also depressed. The S&P 500 (ex-Financials) ratio was 0.41 at the end of Q2, which is a two-year low. On the sector-level, four of the nine sectors have lower cash balances relative to debt than their tenyear average. Please note that all aforementioned and forthcoming references to “cash” refer to cash & short-term investments balances and all references to the S&P 500 aggregates exclude companies in the Financials sector.

Free Cash Flow: With Exception of Telecom, Capital Expenditures Continues to Rise Cash flows from operations amounted to $290.8 billion in Q2 2012, which marks a decline of 1.3% yearover-year. Due to an increase in year-over-year capital expenditures (13.7%), free cash flow to equity declined even further (-12.8%) over the quarter. In fact, only three sectors showed growth in free cash flow to equity: Telecommunications Services (42.6%), Information Technology (6.0%), and Health Care (2.1%). Each of the sectors showed positive growth in operating cash flows (11.6%, 7.8%, and 2.1%, respectively), but the Telecommunications sector’s free cash flow also benefited from a 10.7% year over year decline in fixed capital expenditures. This marked the largest sector-level decline in fixed capital expenditures in the S&P 500, and the sector was one of only two that experienced a decrease year-overyear (the Consumer Staples sector showed a decline of -6.4%). Within the Telecommunications Services sector, the majority of the decline in fixed capital expenditures arose from the sector’s two largest constituents: AT&T Inc. (-16.2% year-over-year) and Verizon Communications Inc. (-36.8%). However, during Q2 2012 earnings calls, the two companies differed in their stance on whether these trends were temporary. AT&T’s CFO, John J. Stephens, attributed the decline in spending to increased efficiency in the beginning of the fiscal year, but expected the reduction to be temporary: “And now that we’ve got that efficiency [in CapEx spending], we’re probably going to return to kind of a normal spend, which will not only have a tick-up in CapEx, but will impact free cash flow.” He later added “And the LTE build and the completion of that process and the importance of that to us may give you some insights into why CapEx on the wireless side may be increasing. We are doing a very dense build…” However, Francis J. Shammo, CFO of Verizon, stated that “We continue to expect our annual CapEx to revenue ratio to decline based on improving revenue trends and disciplined capital spending”. Part of this decline was attributed to “…continued migration of traffic from 3G to our lowercost 4G LT platform, which will drive further improvements in operating and capital efficiency”. Outside of the Telecommunications Services sector, the relatively high growth in fixed capital expenditures marks the continuation of a trend that has been occurring for over two years. Fixed capital expenditures have grown year-over-year in the last nine quarters, and seven of those nine quarters have exhibited double-digit growth. This recent resurgence in internal investment has contributed to the ratio of capital expenditures to sales to hit a three year high (6.5%) on a trailing twelve-month basis. FactSet.com


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September 26, 2012

In particular, four sectors have averaged over 25% year-over-year growth over this period: Information Technology (39.2%), Materials (32.5%), Industrials (29.4%), and Energy (27.9%). Previous editions of “Cash & Investment Quarterly” have focused on the Energy sector due to its size relative to the other sectors—fixed capital expenditures in that sector amounted to more than one-third of the total for all nine sectors under evaluation in Q2 2012. Over the quarter, the Energy sector again registered doubledigit growth with increased spending from some of its largest constituents: Exxon Mobil Corp. (+6.8%), Chesapeake Energy Corp. (+13.1%), Conoco Phillips (+24.4%) and Occidental Petroleum Corp. (+66.1%).

Other Investing Activities: Health Care Acquisitions Close in Q2 2012 Other investing activities were also a drain on cash balances in Q2 2012. Cash flows from the sale of assets increased by 29.9% year-over-year but only amounted to 60.0% of the ten-year quarterly average. In addition, companies purchased more investment securities than they sold for the second consecutive quarter. Apple Inc. led all stocks in the universe in net purchase of investments securities for the fifth straight quarter, though the company also generates a lot of cash flow. Apple has also had the highest quarterly free cash flow to equity over the same five-quarter period. Assets acquired from acquisitions in Q2 2012 marked the third highest quarterly total in ten years as a number of transactions closed within the Health Care sector. In particular, Johnson & Johnson reported $17.7 billion in cash flows from acquisitions (net of cash acquired) due to its completion of the acquisition of Synthes Inc., a Swiss maker of medical and orthopedic tools. In addition, Express Scripts closed their Medco Health Solutions acquisition, which contributed to the reported $10.3 billion in cash flows from business acquisitions. The closing of these two acquisitions were significant for aggregate cash balances—the related cash outflows amounted to more than the value of the entire sequential decline in cash in the S&P 500.

Financing Activities: Purchase of Stock Accelerates; Net Debt Issuance Continues Shareholder distributions in the form of dividends and the repurchase of stock increased 15.2% sequentially and 5.1% year-over-year in Q2 2012. While the number of companies paying dividends and increasing dividends per share payments are at recent highs (see the latest “Dividend Quarterly: US” report for more information), much of the sequential growth in capital distributions was due to increased cash outflows from stock purchases (+27.0% quarter-over-quarter). General Electric Co. was one of the larger contributors to this sequential growth rate—the company repurchased $892.9 million in stock in Q2 following $63.9 million in share buybacks in the previous quarter. For more information on share buyback activity in the S&P 500, please refer to FactSet’s “Buyback Quarterly” report. While equity financing activities were a drain on cash balances, cash inflows from net debt issuance were positive for the eighth straight quarter in Q2 2012. In particular, the Energy sector led all groups by generating $16.0 billion in cash flows from net debt issuance. Within the sector, the two companies issuing the most debt were predominantly using it to finance acquisitions. Kinder Morgan, Inc. issued the majority of its $5.6 billion in debt in connection with the completion of the acquisition of El Paso Energy Corp. While Kinder Morgan’s long-term debt balance more than doubled to $33.8 billion over Q2 2012, the additional debt was primarily driven by the consolidation of financial statements related to the El Paso transaction and from consolidation of a separate venture. In addition, Apache Corp. issued $2.7 billion in debt in Q2. On its Q2 2012 earnings call, the company stated that the issuance of most of the debt was to finance the cash portion of their acquisition of Cordillera Energy Partners, while the remainder was used to repay $400 million in higher-interest notes that came due.

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September 26, 2012

Cash & Short-Term Investments: Within this report, cash, cash & equivalents, and cash & short-term investments are used interchangeably. Also, companies in the Financials sector have been excluded throughout this report. All aforementioned and forthcoming values are in millions, unless otherwise designated. Data is generally organized by adjusted calendar quarters. Adjusted calendar quarters are mapped in three month denominations with 2C capturing data released in May, June, and July. Cash to Debt Ratio – Most Recent Quarter 2.5

2

1.5

1

0.5

In Te form ch at n o i on log y

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Cash to Debt Ratio

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En er gy

10-Year Average

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C Di ons s c um re e ti o r na ry

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C St ons a p um les er

Ut T il it Se elec i es rv om ic e m s un ic a tio n

0

S&P (Ex-Fins) Sector Average 10-Year Sector Average Source: FactSet Fundamentals via FactSet Alpha Testing

Top 10 Companies by Cash and Short-Term Investments (ex-Financials and Managed Health Care) 1 Year 1 Yr Total Sector Cash (Qtr) Growth Cash to Debt Return General Electric Co. Industrials $122,226 (10.4%) 28.5% 51.8% Microsoft Corp. Information Technology $63,040 19.5% 527.8% 24.6% Cisco Systems Inc. Information Technology $48,716 9.3% 298.4% 21.4% Google Inc. Cl A Information Technology $43,122 10.2% 695.0% 42.6% Ford Motor Co. Consumer Discretionary $35,600 6.2% 35.6% 3.8% Oracle Corp. Information Technology $30,676 6.3% 186.2% 9.2% Apple Inc. Information Technology $27,654 (2.6%) #N/A 67.3% Pfizer Inc. Health Care $24,306 (4.6%) 63.0% 48.0% Amgen Inc. Health Care $22,475 17.2% 92.2% 55.1% Chevron Corp. Energy $21,463 19.5% 209.8% 34.2% S&P 500 (Ex-Financials)* $1,177,880 1.8% 39.9% 29.2% *Total return provided for S&P 500 is for the entire S&P 500 index (does not exclude the Financials sector). Company

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September 26, 2012

Growth in Cash & Short-Term Investments: Year-over-Year Growth in Cash & Equivalents (ex-Financials and Managed Health Care) 0.4 0.3 0.2 0.1 0 -0.1

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C T St ons Se elec a p um o rv m les er ic e m s un ic a tio n

YoY Grow th in Cash & Equivalents



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-0.2

Ca re

Quarter-over-Quarter Grow th Source: FactSet Fundamentals via FactSet Alpha Testing

Top 10 Companies by Year-over-Year Growth in Cash and Equivalents* Company

Relative 1 Year to Curr 1 Yr Total Growth MV Return 259.7% 35.0% 71.1% 209.1% 23.2% 17.2% 171.7% 21.2% 6.9% 154.7% 8.7% (11.6%) 153.1% 17.9% 17.6% 152.9% 6.8% 53.7% 121.2% 6.4% 20.8% 117.8% 23.0% 117.5% 116.9% 4.5% 71.1% 104.8% 6.3% 27.5% 1.8% 10.3% 29.2% & short-term investments in the year-ago

Sector Cash (Qtr) Eastman Chemical Co. Materials $3,000 United Technologies Corp. Industrials $16,681 PPL Corp. Utilities $3,565 Exelon Corp. Utilities $2,636 CenterPoint Energy Inc. Utilities $1,635 Lowe's Cos. Consumer Discretionary $2,296 Occidental Petroleum Corp. Energy $4,410 Tesoro Corp. Energy $1,322 Comcast Corp. Cl A Consumer Discretionary $4,332 Kraft Foods Inc. Consumer Staples $4,643 S&P 500 (Ex-Financials)** $1,177,880 *This screen only included companies with over $500 million in cash quarter. **Total return provided for S&P 500 is for the entire S&P 500 index (does not exclude the Financials sector).

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September 26, 2012

Operating Cash Flows Operating Cash Flow – Most Recent Quarter 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

En In er Te form gy ch at n o i on log y

Operating Cash Flow

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Sector Average - OCF

C C Di ons St ons a p um s c um re e les er ti o r na ry

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Free Cash Flow Sector Average - FCF Source: FactSet Fundamentals via FactSet Alpha Testing

Year-over-Year Growth in Quarterly Operating Cash Flow * 0.4

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Ut T il it Se elec i es rv om ic e m s un ic a tio n

YoY Grow th in OCF S&P 500 YoY Grow th in FCF


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YoY Grow th in FCF (%)

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S&P 500 YoY Grow th in OCF Source: FactSet Fundamentals via FactSet Alpha Testing

*Both the Energy and Utilities sectors had negative free cash flow to equity in Q2 2012, which is why their growth rates are hidden.

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September 26, 2012

Investing Cash Flows: Fixed Capital Expenditures to Sales Fixed capital expenditures represent funds used to acquire fixed assets other than those associated with acquisitions. This includes, but is not restricted to, additions and investments in property, plant, machinery and equipment. Fixed Capital Expenditures to Sales – Ten Years, Tailing Twelve Month Basis 0.075

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10-Year Average Source: FactSet Fundamentals via FactSet Alpha Testing

Fixed Capital Expenditures to Sales – Trailing Twelve Month Basis 0.3 0.25 0.2 0.15 0.1 0.05

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En T er Se elec gy o rv m ic e m s un ic a tio n

Cash & ST Investments

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10-Year Average

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S&P Sector Average 10-Year Sector Average Source: FactSet Fundamentals via FactSet Alpha Testing


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September 26, 2012

Investing Cash Flows: Sales and Acquisitions Disposal of fixed assets represents the amount a company received from the sale or disposal of assets, businesses, property, plant, and equipment. Purchase and sale of investments is a net figure representing proceeds from changes in portfolio investments, short-term investments, marketable securities, or proceeds from maturities of securities. Net assets from acquisitions represent assets acquired through pooling of interests or mergers, excluding capital expenditures of acquired companies. Cash Flows from Investments – Ten Years 60,000 40,000 20,000 0 -20,000 -40,000 -60,000 -80,000 -100,000 '03

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Sale of Assets

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Acquisitions of Business Assets Net Sale of Investments Copyright © 2012 FactSet Research Systems Inc. All rights reserved.

Cash Flows from Investments by Sector 6,000 4,000 2,000 0 -2,000 -4,000 -6,000 -8,000 -10,000

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Sale of Fixed Assets

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Net Sale of Investments

C He T al t Di ons Se elec s c um hC o r v ic mm re e ar ti o r es u e na nic ry ati on

Ma In te Te form ri a ch at ls n o i on log y

Acquisition of Businesses/Assets Source: FactSet Fundamentals via FactSet Alpha Testing


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September 26, 2012

Financing Cash Flows: Shareholder Distributions Dividends paid represent the total common and preferred dividends paid to shareholders. Net proceeds from the purchase of stock is the proceeds from sale/issuance of stock (sale of treasury shares, proceeds from stock options, etc.) minus funds used to decrease the outstanding share of common or preferred stock (purchase of treasury shares, repurchase or retirement of stock, etc.) Previously, this page focused on exclusively on cash outflows from share repurchases; the analysis has been broadened to include other activities related to stock issuance. Additional analysis on buybacks and dividends can be found within the Buyback Quarterly and Dividend Quarterly reports. Cash Flows from Stock and Dividends – Most Recent Quarter 0 -5,000 -10,000 -15,000 -20,000 -25,000

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Dividends Paid + Net Purch of Stock

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-30,000 C Inf or Di ons T ec ma s c um hn ti o re e ti o r olo n na gy ry

S&P Sector Avg 10-Year Sector Avg Source: FactSet Fundamentals via FactSet Alpha Testing

Top 10 Companies by Shareholder Distributions – Most Recent Quarter Divs & Net Stock Net Stock Divs Paid Redemp. Combined Company Sector Redemp. (MRQ) (MRQ) Yield* Exxon Mobil Corp. Energy $7,665 $2,657 $5,008 7.4% AT&T Inc. Telecom Services $4,980 $2,581 $2,399 6.8% ConocoPhillips Energy $3,859 $818 $3,041 18.5% Wal-Mart Stores Inc. Consumer Staples $3,186 $1,346 $1,840 4.7% IBM Corp. Information Technology $3,047 $978 $2,069 6.0% Pfizer Inc. Health Care $2,973 $1,633 $1,340 7.9% Philip Morris International Inc. Consumer Staples $2,957 $1,325 $1,632 7.4% Chevron Corp. Energy $2,923 $1,758 $1,165 5.1% Oracle Corp. Information Technology $2,475 $296 $2,179 4.0% Microsoft Corp. Information Technology $2,430 $1,678 $752 2.5% S&P 500 (Ex-Financials)** $127,571 $60,053 $67,753 3.8% *Combined yield is the sum of dividend yield and share yield. Share yield is the trailing twelve month percent reduction in shares and operates under the assumption that the price to earnings multiple remains constant (i.e. the percent reduction in shares translates to an equivalent percent increase in EPS, which is assumed to translate to a percent increase in price). **Total return provided for S&P 500 is for the entire S&P 500 index (does not exclude the Financials sector).

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September 26, 2012

Financing Cash Flows: Net Debt Issuance Net debt issued is the measure of aggregate, net funds from issuance (reduction) of debt and increases (decreases) in capitalized lease obligations. Also included are the increase in debt from acquisitions and the decrease in debt from the conversion of debentures into common stock. Change in Debt – Most Recent Quarter 15,000

10,000

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Cash Flow s from LT Debt Issuance 10-Year Sector Average

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C In Di ons Te form s c um ch at re e n o i on ti o r log na y ry

10-Year Average

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S&P Sector Average Source: FactSet Fundamentals via FactSet Alpha Testing

Top Five Companies by Net Debt Issuance and Reduction – Most Recent Quarter Net Debt Net Debt Issued Avg Total Issued/Avg 1 Yr Total Company Sector (LTM) Debt Debt Return Kinder Morgan Inc. Energy $5,566 $27,276 20.4% 47.6% Caterpillar Inc. Industrials $3,408 $37,635 9.1% 44.7% Apache Corp. Energy $2,765 $9,056 30.5% 3.8% Chesapeake Energy Corp. Energy $2,422 $13,805 17.5% (25.5%) Eastman Chemical Co. Materials $2,165 $2,715 79.7% 71.7% General Electric Co. Industrials ($12,725) $435,785 (2.9%) 52.1% ConocoPhillips Energy ($4,956) $25,684 (19.3%) 27.0% Procter & Gamble Co. Consumer Staples ($3,325) $31,445 (10.6%) 17.7% Johnson & Johnson Health Care ($1,995) $18,507 (10.8%) 16.2% CenturyLink Inc. Telecom Services ($1,202) $22,226 (5.4%) 36.0% S&P 500 $45,434 $2,942,165 1.5% 29.2% *Total return provided for S&P 500 is for the entire S&P 500 index (does not exclude the Financials sector).

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September 26, 2012

Financing Cash Flows: Net Debt Issuance and Total Debt Net debt issued is the measure of aggregate, net funds from issuance (reduction) of debt and increases (decreases) in capitalized lease obligations. Also included are the increase in debt from acquisitions and the decrease in debt from the conversion of debentures into common stock. Debt Cash Flows – Ten Years 120,000 5 100,000 4.5

80,000

4

60,000

3.5

40,000

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20,000 0

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Net Cash Flow s from Borrow ing

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10-Year US Treasury Rate Copyright © 2012 FactSet Research Systems Inc. All rights reserved.

Total Debt by Sector – Most Recent Quarter 700,000 600,000 500,000 400,000 300,000 200,000 100,000

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C Ut il it Di ons i es s c um re e ti o r na ry

Long-Term Debt

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10-Year Average


En er gy

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Ma In T te Te form Se elec ri a o ch at rv m ls ic e m n o i on s un log i ca y tio n

S&P Sector Average 10-Year Sector Average Source: FactSet Fundamentals via FactSet Alpha Testing


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September 26, 2012

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