Citi strategist Tobias Levkovich notes that U.S. corporates are building up massive amounts of cash and investors are starting to notice. S&P 500 companies, excluding financials, have remarkably strong balance sheet positions. They aren’t going anywhere and have build themselves up to withstand economic pressure.
Here it is, corporate America deleveraging:
Yet as this pressure eases and the world recovers, the cash on their balance sheets will be put to action. Whether via share buy backs , dividends (note Pepsi just did this), M&A, or hiring and capex, this historically delevered position means that U.S. companies now have massive capacity to invest in growth opportunities or simply paying their investors handsomely with cash.
At this stage, Mr. Levkovich seems to believe that we could see an uptick in M&A, but this could be muted. More likely in his view, is a structural shift towards higher dividend payments to investors in order to win back the market’s love for stocks:
Tobias Levkovich @ Citi:
Dividends may be needed to woo back a “burned” investor base seeking income. After two 50%+ declines in the past decade, the individual investor may need to see some upfront money in the form of increased dividends to get attracted once again to the allure of equities. As a reminder, the dividend yield was above the Treasury bond yield for years after the Great Depression and dividends historically have provided about half of stock market returns. With ageing demographics, one could assume a new dividend trend may have to emerge to compete with fixed income products as investor demand some upfront money and not just long-term appreciation potential.
(Via Citi Investment Research, Tobias Levkovich, Pondering The Cash Conundrum, 16 March 2010)
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