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Notes to myself, possibly of interest to others.
-- Bill Northlich

Wednesday, March 28, 2012

Rosenberg Recents - Cash on Corporate Balance Sheets

The extremely high levels of cash also lead to three other themes beyond just the positive background they establish for corporate bond investments:
  1. M&A is going to very likely emerge as a critical theme as this cash gets put to work. This means identifying those takeover candidates and perhaps also assessing which banks are most levered to this part of the financial industry - the fees should be substantial. As I already hinted. U.S. financials are screening quite well right now on a GARP basis.
  2. Dividend plays may have lagged so far this year after the blowout outperformance in 2011. but this secular theme is intact. Dividend payments rose 10.4% in 2011 to $814 billion and this followed an 18.9% increase the previous year. This is an important source of cash-flow returns for investors and the record-high level of cash on the corporate balance sheet points to higher payout ratios ahead. This is critical because it was only the dividend yield that prevented the S&P 500 from generating a negative total return last year. For investors. interest income has fallen 3% from year-ago levels given this Fed-engineered ultra-low yield environment. In fact. since the Fed embarked on this massive rate-cutting campaign in late 2007. interest income for the household sector has collapsed $350 billion or by roughly 30%.
  3. The large cash stash on corporate balance sheets also provides the business sector with substantial leeway to buy back their stock. lndeed. S&P 500 companies bought back $404 billion of their stocks in 2011. doubling in a short span of two years. So far this year. buy-backs are on track to $550 billion (so far this year. there has been nearly $120 billion in buy-back announcements). What this. in turn. does is actually help the valuation of the equity market since it reduces the divisor when analysts and strategists are calculating price-to-earnings multiples. Stock buybacks help improve earnings per share rather substantially. and this in turn can provide a nice cushion during periods like this when earnings growth starts to decelerate. This by no means warrants over-exposure to equities at the current time, but if you are checking off the list of minuses and positives. this is certainly one that goes into the latter column.

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