More Signs of an Economy on the Mend?
March 5, 2010
American corporations "continue to hoard more cash then ever," but there recently been "tentative signs" that companies may be getting "comfortable using the money to do some shopping," The Wall Street Journal reported yesterday in the article, "With Fistfuls of Cash, Firms on the Hunt."
The 382 nonfinancial firms in the Standard & Poor's 500 that have reported results for the fourth quarter of 2009 are now holding $932 billion in cash and short-term investments, according to a Wall Street Journal analysis of data from Capital IQ. That sum is up 8% from the third quarter and up 31% from a year ago.
At a time of low interest rates, reopened credit markets and growing optimism about the economy, CEOs and their boards seem to be questioning the wisdom of sitting on all that cash. And with the S&P 500 still trading 29% below its October 2007 peak, companies are deciding cash is their preferred currency for acquisitions -- rather than shares they see as undervalued.
Through the first two months of the year, the percentage of all-cash deals in the U.S. more than doubled from 2009, according to an analysis by Thomson Reuters. Nearly 50% of deals this year have been all-cash offers, up from 24% of deals in 2009 and on par with 2006 and 2007, when credit was in oversupply.
The article also notes that share buy backs and dividend increases are on the rise. February, with 62 announced share buybacks valued at $40.1 billion, marked the biggest month for announced share buybacks since September 2008. S&P estimates that buybacks were up 37 percent in the fourth quarter from the third quarter. The S&P also reported that there were 79 dividend increases and only two decreases for the past three months, compared with 58 increases against 41 decreases for the year-ago three-month period.
However, the most visible use of cash hoards has been though merger activity.
When taking into account all the money spent on deals, 55% of the consideration during 2010 has come in the form of cash. That number was 40% in 2009. The highest figure during the past decade was 57% in 2007, at the height of the leveraged-buyout boom, according to Thomson Reuters.
"In many cases, if you use cash for share buybacks or dividends you are signaling to the market you don't have a better use for the cash," said Paul Parker, Barclays Capital head of global M&A. "For most CEOs, that message is the last one they want to send."
