Corporate cash to investors
Joel Dresang: Isabelle, corporate cash is at an all-time high. It’s like 30% of corporate assets. They can’t sit on all that forever. What are some of their choices for deploying that cash?
Isabelle Denton: So companies overall have three choices of what they can do. They can either invest in other companies through either mergers or acquisitions. They can give back to shareholders through dividends or share buybacks. Or, they can invest in themselves through spending through capital expenditures like research and development or plant and equipment.
Joel: Well, what are the consequences for shareholders – like for the mergers and acquisitions?
Isabelle: So we’ve seen a big uptick in mergers and acquisition activity, and that’s a good sign for investors for the growth of corporate America. Companies only want to do these deals if they think they’re doing to be beneficial for them.
So the fact that we’re seeing so many companies who believe they could add value through buying another company or merging their operations, that’s a good sign for where companies think the growth is going for corporate America.
Joel: What about buybacks and dividends?
Isabelle: So for buybacks, it’s good news for investors in the short term. It helps earnings per share because there’s less shares outstanding, so it gives it a nice boost.
Dividends have a little bit more of a long-term effect for investors because their dividends are increased. It’s also more of a long-term commitment for companies. However, it doesn’t give us any indication of what the company’s doing internally to help growth in the long term.
Joel: We’ve been noticing that the trends for mergers and acquisitions and buybacks and dividends are trending very high. Is there any sign that those are peaking?
Isabelle: Companies have had a nice environment with lower interest rates, there’s been benefiting from that for more mergers and acquisitions. They’ve even been using some sale of debt proceeds to help fund share buybacks.
But with the Fed likely raising rates sometime in the near future, it’s thought that some of that will slow down and companies will look for other ways to spend their cash.
Joel: So other ways including capital expenditures?
Isabelle: That’s right. And as a long term investor, that’s really what we want to see. When companies start spending on things like plant and equipment or research and development, that’s the kind of things that helps for long-term growth, which of course helps for long-term investors.
Isabelle Denton is a registered representative and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
(initially posted Aug. 27, 2015)