Some Cash Goes to Work

S&P has increased its yearend S&P 500 targets for 2004 and 2005 as mergers and acquisitions heat up and investors add to their stock portfolios

By Joseph Lisanti

Companies and investors are starting to find uses for the cash reserves they have built up. On the corporate side, money seems to be going into acquisitions and dividends. Individuals appear to be buying stocks.

Some noteworthy deals have surfaced recently in the retail, confectionery, and media businesses. We estimate that the companies in the S&P 500 are now holding close to $600 billion in cash. These deals will put some of that cash to work, and we expect that additional merger activity will use up more of the corporate stockpile in coming months.

The cash holdings of Corporate America will decline by about $32 billion on Dec. 2, when the world's largest software company pays history's biggest aggregate one-time dividend to its shareholders. Although it is making the greatest splash, this is far from the only extra dividend being paid this year. In the first 10 months of 2004, there were 268 extra, or one-time, dividends declared, according to Standard & Poor's Dividend Record, which compiles data from about 7,000 public companies. In the same periods in 2003 and 2002, the number of extra payments totaled 225 and 160, respectively.

Corporate profit growth, though strong, is moderating. As a result, some companies may be reluctant to increase their regular dividends substantially. But with payments to shareholders taxed at a favorable 15% maximum, we would not be surprised to see more extra dividends declared in the year ahead.

Meanwhile, since the election, investors have been pouring cash into equity mutual funds. And investors have reserves to tap if they want to put more into stocks. Currently, retail money market funds hold close to $830 billion. Even if we count a large part of that as "rainy day funds," investors have the cash to drive stocks higher.

As a result, we've raised our S&P 500 yearend target for 2004 to 1200 and now see 1300 at the end of 2005.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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