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Buybacks, Not Dividends, Will Lead Cash Return Plans, UBS Says

Companies flush with cash will opt to buy back their stock to return money to shareholders, instead of issuing or increasing dividends, according to UBS AG. (UBSN)

Share repurchases haven’t recovered as much as dividend payouts since the U.S. recession ended, Jonathan Golub, chief U.S. equity strategist at UBS, wrote in a report today. While buybacks have increased since 2009, they’re still “at less than half peak levels” from 2007, Golub said. Dividends grew at “a steadier pace,” he added.

Executives began cutting expenses and hoarding their cash to battle 2008’s contracting profits and weak consumer demand. With the recession’s end in June 2009 and the U.S. forecast for the biggest annual growth rate since 2005, companies are starting to distribute their record cash through buybacks and dividends. Golub said that will continue, and investors should consider companies with cash that had 2010 repurchase plans.

“The real opportunity for payouts lies in the large cash positions on corporate balance sheets,” he said. “We are in the early innings of a long process of repatriating cash to shareholders.”

Companies are returning almost 60 percent of their net income to shareholders, according to Golub. That’s still below the 94 percent peak during the last cycle. Even though dividends increased 15 percent last quarter and buybacks more than doubled, Golub estimates buybacks will continue to rise because they are still below peak levels.

Technology companies are most likely to return capital to shareholders, Golub said. He created a list of large companies with at least 16 percent cash as a percentage of assets and earnings growth estimates of 16 percent for 2011. The list of smaller companies required at least 20 percent cash and earnings growth of 20 percent.

Below is Golub’s large-cap and small-cap stock lists.

Large-cap stocks:

Agilent Technologies Inc. (A US)
Analog Devices Inc. (ADI US)
Applied Materials Inc. (AMAT US)
Autodesk Inc. (ADSK US)
C.H. Robinson Worldwide Inc. (CHRW US)
Coach Inc. (COH US)
DeVry Inc. (DV US)
Estee Lauder Cos. (EL US)
Fluor Corp. (FLR US)
Google Inc. (GOOG US)
Hasbro Inc. (HAS US)
Interpublic Group Of Cos. (IPG US)
Juniper Networks Inc. (JNPR US)
Kohl’s Corp. (KSS US)
Rockwell Automation Inc. (ROK US)
Masco Corp. (MAS US)
Netflix Inc. (NFLX US)
Robert Half International Inc. (RHI US)
Sara Lee Corp. (SLE US)
Starbucks Corp. (SBUX US)
Teradata Corp. (TDC US)
Titanium Metals Corp. (TIE US)
Varian Medical Systems Inc. (VAR US)
VeriSign Inc. (VRSN US)

Small-cap stocks:

ACI Worldwide Inc. (ACIW US)
American Public Education Inc. (APEI US)
Cabot Microelectronics Corp. (CCMP US)
Cadence Design Systems Inc. (CDNS US)
Crocs Inc. (CROX US)
Cypress Semiconductor Corp. (CY US)
DealerTrack Holdings Inc. (TRAK US)
Digital River Inc. (DRIV US)
Dionex Corp. (DNEX US)
Dycom Industries Inc. (DY US)
Encore Wire Corp. (WIRE US)
FactSet Research Systems Inc. (FDS US)
Frontier Oil Corp. (FTO US)
Hansen Natural Corp. (HANS US)
Insperity Inc. (NSP US)
Intermec Inc. (IN US)
Kopin Corp. (KOPN US)
Lam Research Corp. (LRCX US)
LCA-Vision Inc. (LCAV US)
Lincoln Electric Holdings Inc. (LECO US)
Liquidity Services Inc. (LQDT US)
Manhattan Associates Inc. (MANH US)
Micros Systems Inc. (MCRS US)
MTS Systems Corp. (MTSC US)
Mueller Industries Inc. (MLI US)
National Instruments Corp. (NATI US)
Oplink Communications Inc. (OPLK US)
Panera Bread Co. (PNRA US)
Polycom Inc. (PLCM US)
ResMed Inc. (RMD US)
Skyworks Solutions Inc. (SWKS US)
Sykes Enterprises Inc. (SYKE US)
Timken Co. (TKR US)
Varian Semiconductor Equipment Associates Inc. (VSEA US)
Viad Corp (VVI US)
Vishay Intertechnology Inc. (VSH US)
Winnebago Industries Inc. (WGO US)

To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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