(June 14, 2012) — Cash-rich companies could provide the answer for investors who are desperate for returns as the corporate sector’s rude health is set to pay dividends, market experts have claimed.
Cash held on company balance sheets in the United States and Asia ended last year at record high levels, and were approaching a similar point in Europe, Standard Life Investments said this week.
Overall, companies are in much better shape financially than before the crisis – which sits at odds to the current economic environment – and means they are likely to be undervalued, offering various benefits to investors. Earlier this week, record numbers of respondents to the Bank of America-Merrill Lynch Fund Manager Survey said they thought equities were undervalued.
The top 1,500 US quoted non-financial companies have a record $1.5 trillion dollar cash pile between them – of which half is off-shore for tax reasons – according to Patrick Moonen, Senior Equity Strategist, ING Investment Management.
As a result of all this spare cash, share buy-backs, which would increase earnings-per-share for investors, are likely to become more frequent.
Moonen said: “These strong corporate balance sheets may also lead to further de-equitisation. In other words, by buying back their own shares companies reduce the outstanding number of shares. This leads to higher EPS, an increase in the return on equity and eventually a rise in the price to book ratio. Therefore, we expect that they will increasingly return money to shareholders through dividends and equity buy backs.”
This corporate health could also push further into the wider markets, which are in desperate need to be extracted from the eddies of the sovereign debt crisis.
Andrew Milligan, Head of Global Strategy at Standard Life Investments, said: “Prior to the financial crisis, there was pressure on companies to have as efficient a balance sheet as possible. In recent years, firms have dramatically rebuilt their cash holdings through restraining such areas as capital spending, dividend payments, share buybacks or M&A.”
Milligan added: “Looking ahead, it is hard to see a sustained revival in any of the major economies unless companies start actively to put cash to work.”