Fundamentally: Who Says Companies Aren’t Spending?

CONVENTIONAL wisdom says the unwillingness of businesses to spend and employ more workers is holding back the economy and the stock market.

“People keep repeating it as if it were a mantra: ‘Companies refuse to hire; companies refuse to spend,’ ” says James W. Paulsen, chief investment strategist at Wells Capital Management.

But this criticism isn’t quite right, Mr. Paulsen says.

It’s certainly true that most businesses haven’t been willing to expand payrolls significantly in the last two years, says Richard Weiss, head of asset allocation strategies at American Century Investments. “But there’s cash being used in less visible ways,” he adds.

To be sure, this type of spending — from dividend increases to corporate acquisitions — may not be enough to pull the economy out of its rough patch. But at least “it indicates that companies are more confident in the economic recovery” than some might think, says Brian G. Belski, chief investment strategist at Oppenheimer Company.

In June, manufacturing and trade sales rose more than 12 percent from June 2010, according to the most recent Census Bureau data. Stripping out petroleum products, whose value was recently inflated by high oil prices, this is still the highest level for business sales in more than five years.

And some companies aren’t just continuing to pay dividends despite the sluggish economy — they are increasing them. (Monsanto and General Mills are just two examples.) This is something that investors didn’t see in the 2008 downturn.

So far this year, there have been 241 dividend increases or initiations among Standard Poor’s 500 companies, versus only three dividend cuts, according to Howard Silverblatt, S. P.’s senior index analyst.

Collectively, those moves have increased payments to shareholders by nearly $29 billion, he says. That’s more than double the amount of dividend increases that S. P. 500 companies delivered in the first eight months of last year and is a reversal from the $41 billion in dividend cuts made from January to August 2009.

“The bottom line is that dividends are doing extremely well,” Mr. Silverblatt says.

Investors with dividend-paying stocks have also fared relatively well. While most types of equities are down this year on recession fears, dividend-paying stocks have held up far better than average. PowerShares Dividend Achievers, an exchange-traded fund that invests in stocks that have bolstered their annual payouts for at least 10 consecutive years, has lost 3.7 percent year to date, versus a 9.5 percent loss for the S. P. 500.

Strategists say companies seem comfortable returning profits to shareholders because of stronger-than-expected earnings and all the cash on their balance sheets. S. P. 500 companies are sitting on $1.13 trillion in cash and short-term investments — two-thirds more than they had heading into the recession in 2007, according to Capital IQ.

In a slow-growth economy, this cash also gives companies the flexibility to increase revenue and profit growth through mergers and acquisitions, says Richard Peterson, a director at S. P.’s valuation and risk strategies unit. He notes that domestic companies are on track to post their first year of $1 trillion or more in deal activity since 2006.

What’s more, the third quarter is on track to be the busiest period for mergers and acquisitions since the spring of 2007, Mr. Peterson says. About halfway in, some $194 billion in M. A. deals have been announced, versus $269.8 billion in the full second quarter.

“Despite what’s transpired in the markets in the past several weeks,” he says, “there are very few signs of a pause in activity.” Just last week, Google announced a planned $12.5 billion acquisition of the mobile phone maker Motorola Mobility.

Mr. Peterson says the trend is likely to continue, not only because of companies’ cash on hand, but also because investment-grade corporations can still borrow cheaply in the bond market, thanks to strong demand for high-quality bonds.

Duncan W. Richardson, chief equity investment officer at Eaton Vance , says that “this is very different than 2008,” as companies are in much better shape today.

As for job creation, Mr. Richardson says it always tends to come in the later stages of an economic expansion. But he says that “if investors wait on the sidelines for the job situation to pick up dramatically, they’ll probably be jumping in too late” to make any money.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

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