U.S. Public companies are giving cash back to investors at unprecedented levels. Companies in the S&P 500 index are expected to pay at least $300 billion in dividends in 2013, according to S&P Dow Jones Indices, which would top last year’s $282 billion. Apple alone is sitting on $137 Billion in cash and is subject to much speculation about whether it will increase its dividend, buy back shares or a perpetual dividend through preferred shares. Analysts expect Apple to payout a minimum of $10 Billion to investors this year, although David Einhorn’s recent lawsuit may encourage them to pay out more. Home Depot, General Electric and PepsiCo also recently announced major buy backs.
Last Thursday, the Fed also compounded this trend by passing positive stress test results of 17 of the largest US financial groups, which analysts are expecting to result in increased dividends and share buybacks.
The Fed’s most recent Flow of Funds report showed that non-financial corporations in the U.S. held approximately $1.8 Trillion in cash or cash equivalents, so there is an enormous cash pool from which to pay back investors or invest in the business.
Stock buybacks boost earnings-per-share, improving a keenly-watched metric by investors. Buybacks could also signal a belief among company insiders that their stock is undervalued. Many cautious investors have been moving toward stocks paying high dividends or those with share buyback programs, hence the potential for short-term share price increases.
When a company is giving cash back to investors, are they really saying that they don’t have any better use for it internally? What about growth initiatives? Acquisitions? Can we legitimately believe that an investor receiving cash is going to contribute to U.S. GDP at the same level as a Company utilizing the cash for growth initiatives? When you think about it, that’s a little concerning that Company Directors can’t find alternative ways to reinvest in their business and look for growth.
How about Private Business?
Can you imagine translating this to private business? If you were to think of two similar companies and one of them was reinvesting cash into their business, going after growth and business improvement, while the second was stripping cash from the business to pay to the owners, which would you back to perform better in the coming years?
Of course, it’s never this simple, but sometimes we need to consider an alternative perspective; in particular at a time when the economy could use every ounce of stimulus from companies doing what they are supposed to do – grow their businesses. And remember that business investment in growth should still return value to investors, but perhaps in the medium to long-term rather than the very short-term.