Tech companies in particular see cash hoards growing; will dividends increase?
US corporations are holding growing piles of cash as income continues to outpace expenditures. According to the latest figures from the US Federal Reserve, US MNCs hold more than $2tn in the second quarter, up 4.5 percent compared to the first quarter. And they’re ready to spend it, although for now, mainly on themselves or their shareholders.
“Corporations are looking for ways to redeploy their cash,” says Cathy Gregg, partner at treasury consulting firm Treasury Strategies. According to the firm, companies over the next six months “will continue to deploy cash to maximize their return in such areas as capital expenditures, mergers & acquisitions, and share buybacks.”
They’ll also in some cases increase their dividends. Technology companies have been boosting dividends over the past year, although as an industry, their dividend offerings are about half that of mature industries. According to Moody’s, the percentage of discretionary cash flow paid as dividends is expected to remain in the 20 percent to 25 percent range. In other industries that figure can be as much as 40 percent.
However, tech companies have an excuse: most of their cash, about 70 percent, is overseas; and it’s not worth the tax hit to bring it home for dividends. “Where cash is held and generated … affects the ability of technology companies to increase dividend payments,” wrote Rick Lane, a senior vice president at Moody’s in a note to clients. “Many generate more money overseas than in the US, and they could be on the hook for hefty tax payments if they use cash made abroad to pay US-based common dividends.”
Microsoft is one such company. The tech giant has been fighting off calls to increase its dividend for some time (see related story here). The company has a reported $53bn cash hoard but refuses to boost its dividend, likely because $42bn of that hoard, or more than 80 percent, is held overseas. Apple, which doesn’t even pay a dividend, holds $76bn with an estimated $41bn held overseas. Cisco is the overseas cash leader with more than 90 percent of its $43bn held outside the US.
For many investors, that Cisco is holding its cash overseas is probably a good idea. That’s because it has become the poster child of why companies should not do stock repurchases. According to reports, Cisco over the last five years has used up $36bn in buying back stock, while its share price has tumbled by more than 10 percent. Many commentators, including Jim Cramer of CNBC, continue to decry the use of excess cash for buybacks. Better, they say, is to just return the money via a dividend, or, as some companies in a Treasury Strategies survey have reported, put it toward capital expenditures.
According to Treasury Strategies, clients continue to expect strong cash flows from operations and will maintain an “increased interest in a strategic redeployment of cash,” like putting it back into the company. And good news for treasurers, some will put the money toward upgrade treasury technology over the next six months.