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

Tuesday, March 13, 2012

Rosie - High Corporate Cash Levels: Opportunity

The extremely high levels of cash ... lead to three other themes beyond just the positive background they establish for corporate bond investments
  • 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 we hinted last week, the US financials are screening quite well right now on a GARP basis.
  •  Dividend plays may have lagged so far this year after the blowout out-performance in 2011, but this secular theme is intact.  Dividend payments rose 10.4% 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. 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 more than 25%. This could be one reason why dividend and related cash-flow themes have become so compelling (and why it is that articles like Buyout Debt Lures Hungry Investors (page B1) and Where to Find the Best Rates (page 07) showed up in the weekend WSJ).
  • The large cash stash on corporate balance sheets also provides the business sector with substantial leeway to buy back their stock. Indeed, net new issuance of equity as year was -$246.8 billion the third largest amount of stock taken out of the system on record. What this 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 — the 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 bone means warrants overexposure to equities at the current time, but if you are checking off the list Of n'ilnuses and positive, this is certainly one that goes into the latter column.

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