Cash-Rich Companies: M&A, Buybacks or Dividends?
It’s been an interesting and tumultuous few years. But, through it all, companies with the ability to manage their finances well have managed to do all right. While even the best stock in the world fall when the rest of the market is in a rout, the best companies see their stocks recover – or at least out-perform the other stocks on an index. For buy and hold investors, now is a great time, since it’s possible to find some great deals. But what’s going on with companies?
Because of the economy, many companies have been hoarding cash. It’s a vicious cycle: Companies hoard cash because they want to shore up. They won’t spend the money in hiring until the economy improves, but the economy won’t improve until there are more workers with disposable income. So, in the meantime, companies look for things to do with their cash, since they’d rather put it to work investing in the company than sitting in Treasury bonds at really low rates. Generally, in these situations, the options are:
- Mergers and acquisitions
- Stock buybacks
- Dividend payments/increases
With M&A, the company might get a new division, or strengthen its position by merging with a bigger company. In any case, such situations don’t do much for investors, unless they happen to be the ones holding the stock that increases in value as a result of the M&A activity.
Companies like stock buybacks, though, since it puts their cash to work, and CEOs and other company bigwigs can get a good deal. The interest in stock buybacks right now is an indication that many companies think that their shares are a great value. For the investor with an eye for a bargain, this can be telling. And, if you already own shares, the result of the buyback is often that your shares – as they remain – can become more valuable.
What’s really encouraging, though, is that many companies are considering dividends. Lexmark just announced that it will begin paying a dividend. And with cash reserves at highs not seen in decades, there are a number of companies that some analysts think should start paying dividends. Interestingly, companies that offer dividends often outperform companies that don’t (at least on the S&P 500). Whether it’s because the promise of dividends attracts more investors, or whether it’s because companies know they have to husband their resources better to pay a dividend (or both), companies do well.
And, for dividend investors, now might be a great time to buy. Valuation is lower than it has been in a long time. It’s possible to find good deals, and build your income portfolio. Consider your options, and your goals for the future. Then see if anything appeals to you. Until companies start using their cash to hire workers, and until the economy starts to recover, your best bet is likely to look for solid, cash-rich companies