Corporate cash stockpiles and investors’ demand for yield may boost shareholder payouts.
Corporate treasurers are sitting on some of the biggest cash hordes in several years. According to today’s Wall Street Journal, the nonfinancial companies in the S&P 500 had a record $832.4 billion in cash at the end of last year. A lack of capex fundng needs and attractive investment opportunities on the one hand and investors’ desire for better yields on their stockholdings on the other is prompting boards to consider boosting dividends for the first time since the crisis began.
According to members of The NeuGroup’s Treasurers’ Group of Thirty, the market signals sent by dividends have finally reverted to normal, exacerbating this pressure. That is, during the crisis, a cut in dividends was seen as a sensible, positive move. Now things have returned to normal, and a cut will be seen as a sign of distress and punished by shareholders, while an increase will be seen as a (somewhat more modest and fleeting) positive signal, and at least temporarily applauded.
The trend spans the Atlantic. In the US, the Journal reports that the first quarter has already seen the biggest dividend payout by S&P500 firms since the fourth quarter of 2007. Meanwhile, large European companies are expected to increase payouts to shareholders by 18 percent this year, according to a Factset study reported in the Financial Times.
Treasurers are in a bit of a quandary, though. The financial crisis made piling up cash a sound strategy, and while the capital markets are now open for business and rallying, the low yields on invested cash have to be weighed against negative arbitrage on opportunistic bond offerings. Meanwhile, T-30 group members report increasing numbers of questions from equity analysts on the topic of “optimizing balance sheets” – essentially code for “Why don’t you leverage up?” With the bank market still regaining its sea legs and exogenous risks to the capital markets lurking, treasurers might want to hang on to at least some of that cash for the time being.