As the global recession and financial crisis recede in the
rearview mirror, companies have been acting more proactively in
using their balance sheets in ways that enhance shareholder
value. But we think they can do a lot more.
As the market tumbled and liquidity dried up after 2008,
companies became very conservative, hunkering down and building
massive cash reserves on their balance sheets. By mid-2013,
U.S. companies were sitting on cash that was equivalent to
about 11 percent of their total assets (see chart below), a
three-decade high and earning almost nothing. Whats more,
a long decline in interest rates made borrowing much
When corporations dont put their healthy balance
sheets to work in productive ways, shareholders get
Thankfully, that trend has changed. With borrowing costs
still very low and business conditions stable to improved,
management teams have become more receptive to using debt to
buy back shares, increase dividends and make acquisitions.
Each of these actions can boost shareholder value. Share
buybacks shrink the total number of shares outstanding and give
a shot in the arm to earnings per share by helping them grow
more rapidly in the years ahead, all things being equal.
Dividend payments provide attractive income to investors, and
acquisitions if executed thoughtfully can create
new avenues for business growth.
It is getting more difficult to find companies that appear
content to ignore low interest rates and high cash balances.
But we still see some companies doing exactly that, even good
businesses that represent attractive investments. They can do
better for their shareholders.
Take Qualcomm. The telecommunications giant is a well-run
business, but managements strategy for returning capital
to shareholders has been underwhelming. The firm sits quietly
in San Diego and has a net cash balance equivalent to about $18
per share, with $6 per share of that held domestically
making it more accessible. Without borrowing a cent or
repatriating any offshore cash, Qualcomm could buy back 9
percent of its shares outstanding. By issuing relatively cheap
debt, it could have more cash on hand and accomplish the same
We believe that buying back shares would benefit both the
stock price and shareholder value. The company reported $1.5
billion in share repurchases for the second quarter. But since
these purchases were used to offset the exercise of company
stock options, the average number of shares outstanding
actually rose compared with the same quarter in 2012 and, for
that matter, the first quarter of 2013.