`Use It or Lose It’ Should Be the Rule on Corporate Cash: View
U.S. companies are holding about $2 trillion in cash, and the amount keeps growing, especially as many corporations report strong first-half profits on top of robust 2010 earnings. This leads to a few questions: Shouldn’t managers put their cash to work, or pay it in dividends? And if they don’t, shouldn’t shareholders be getting impatient?
Total dividends paid in the first quarter of 2011 fell from a year earlier. The average dividend yield on Standard & Poor’s 500 Index companies is about 1.9 percent. That’s half the level of the 1980s and a fifth less than in the 1990s.
During the late 1990s, dividends plunged as investors began accepting a trade-off: low payouts in exchange for rising share prices. Companies also had ample uses for their cash, such as investing in technology to gear up for the world of online commerce.
The 2008 financial crisis led companies to cut payouts further to conserve cash. General Electric Co., for example, slashed its quarterly dividend of 31 cents a share by two-thirds. While GE has since raised the dividend to 15 cents, it’s still holding $127 billion in cash and liquid assets.
At least GE pays a dividend. Ford Motor Co. (with a $35 billion cash pile) and Dell Inc. ($14 billion) don’t return anything to shareholders. With Ford, this might be deemed a double insult as its shares are down this year.
Companies no longer need to hoard cash to weather the economic crisis. Yet they aren’t putting their money to good use by acquiring competitors to gain market share: Companies in the S&P 500 have used a mere $70 billion of their cash for deals so far this year.
Nor are chief executive officers doing much in the way of using excess cash to build plants or buy new technologies. The same goes for innovating products or expanding into fresh territory. Given the employment numbers, it’s safe to conclude that they aren’t using the cash to add workers.
Instead, many companies prefer to use cash for stock buybacks -- suggesting that they’re running low on good ideas. The premise of a stock repurchase is that it produces higher per-share earnings (the same amount of net income divided by fewer shares). While some investors say dividends and stock repurchases are equally rewarding for them, we’re skeptical.
Companies tend to be no smarter than anyone else when it comes to judging the value of their stock. As McKinsey & Co. reported in a May study, “we’ve rarely seen companies with a good track record of repurchasing shares when they were undervalued; more often than not, we see companies repurchasing shares when prices are high.”
It would be unfair to condemn every company that’s hoarding cash as a dividend deadbeat. Apple Inc. just reported that it has $76 billion on hand, and while it has never paid a dividend, it has more than compensated for it with ingenuity and a scorching stock price. Apple is now the world’s second-most-valuable company.
Berkshire Hathaway Inc. is another company that has never paid a dividend. Of course, Berkshire has Warren Buffett deploying the firm’s cash, like its March agreement to acquire chemical maker Lubrizol Corp. for $9 billion.
These are exceptions. Unless companies begin to do more with the money they’re sitting on, shareholders should feel justified in raising questions. After all, corporate executives aren’t bankers; if shareholders wanted to watch their cash earn a pittance in interest, they would have put it elsewhere.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at firstname.lastname@example.org.