8 companies cut back most on the future

You have to spend money to make money. So here's a bad sign: Companies are cutting back their spending on the future, and some by staggering amounts.

Eight companies in the Standard & Poor's 500 index, mostly energy and commodity firms like Diamond Offshore Drilling (DO) and Apache (APA), but also entertainment firm Twenty-First Century Fox (FOXA), reported at least 45% lower spending on capital expenditures in 2015 compared with the year before, according to a Paste BN analysis of data from S&P Capital IQ.

Capital expenditure spending, which is money used to buy new plants and equipment or maintain what is already in place, is closely watched as a harbinger of how confident executives are and is considered a tip-off of potential revenue growth.

This actually represents a broad and important trend. The 461 companies in the S&P 500 that have reported their capital expenditure spending for calendar 2015 have, in aggregate, trimmed it by 3.1%, according to S&P Global data.

The cuts are even more severe globally, falling 10% in 2015, according to a report by Gareth Williams, research analyst at Standard & Poor's Ratings Services, that looked at non-financial companies. There's not much relief in sight, says Williams, who forecasts capital spending to drop another 4% this year and 2% next year. Even increased capital spending by technology, automakers, media, and health care companies can't counteract the cuts, Williams says.

The increased capital spending in some sectors "is thin gruel given renewed concerns about the fragility of the global economy and questions about the efficacy of central bank efforts to trigger investment," Williams said in a report.

The fact companies are cutting back isn't very encouraging for investors who are already concerned about a steady drop-off in revenue recently. S&P 500 companies reported lower revenue in each of the past four straight quarters, resulting in a nearly 3% drop in the top line in 2015, says S&P Global. Revenue is expected to grow by just 1.1% this year. But with companies pulling back on capital spending, investors might doubt even that is obtainable.

The cuts in spending are mostly the result of energy and commodity companies curtailing capacity amid the vicious drop in energy prices. Half of the 10 S&P 500 companies that cut capital spending the most in 2015 are in the energy sector. Excluding the 28% decline in capital spending by energy companies in the S&P 500, capital spending was actually up 8.2% for the year, says Howard Silverblatt of S&P Global Indices. Seven of the 10 industry sectors of the S&P 500 boosted capital spending last year, he says.

Even so, investors can't ignore the massive capital spending cuts by energy firms. This one sector accounts for about a quarter of all capital spending, Silverblatt says.

Some of the cuts are downright massive. Diamond Offshore, which operates a fleet of 32 offshore drilling rigs, reported 59% lower capital spending in 2015. That's just one example from the oil patch: Apache cut capital spending by 55%. And even Leucadia National (LUK), a diversified company involved in everything from investment banking to real-estate, slashed its capital spending 51% last year largely due to its energy businesses, says James Sinegal, research analyst at Morningstar. "They dramatically cut down on their spending on oil and gas businesses in 2015, which makes sense given the crash in energy prices," he says. Sinegal points out the company also reduced capital spending at its investment bank.

Business changes can distort the numbers in some cases.Twenty-First Century Fox reported 58% lower capital spending. The drop is a reflection of company's divestiture of a portion of ownership in a European telecom business. So those capital spending numbers aren't included in their financials anymore, says Ben Mogil, research analyst at Stifel Nicolaus. The company also didn't have as much investment to make in new sports properties, resulting in lower capital spending, says Joe Bonner, research analyst at Argus Research.

The question is how much spending will drop this year. It's not looking great - especially globally. "Investment intentions have deteriorated in the great majority of cases, with 25 out of 32 global (capital spending) leaders seeing 2016 forecasts cut in the past six months,"  Williams says in his report. "Growing uncertainty around prospects for 2016, suggest little grounds for optimism for (capital spending) in the near term."

S&P 500 COMPANIES THAT REPORTED BIGGEST REDUCTIONS IN 2015 CAPITAL SPENDING *

Company, symbol, % ch. capital spending 2015, sector

Diamond Offshore Drilling, DO, -59.1%, energy

Twenty-First Century Fox, FOXA, -58.2%, consumer discretionary

Apache, APA, -54.5%, energy

Cimarex Energy, XEC, -52.3%, energy

Leucadia National, LUK, -50.8%, financials

Occidental Petroleum, OXY, -49.3%, energy

Baker Hughes, BHI, -46.1%, energy

Agilent Technologies, A, -45.8%, healthcare

* based on 2015 calendar year

Sources: S&P Global Market Intelligence, Paste BN